10-Q/A

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q/A
(Amendment No. 1)

(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 27, 2006

OR

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

FOR THE TRANSITION PERIOD FROM               TO               

Commission File Number 0-24320

TAPESTRY PHARMACEUTICALS, INC.

(Exact name of Registrant as specified in its charter)

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

4840 Pearl East Circle, Suite 300W
Boulder, Colorado 80301

(Address of principal executive office, including zip code)

(303) 516-8500

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):   Large accelerated filer o   Accelerated Filer o   Non-accelerated filer x

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

As of October 31, 2006, the registrant had 16,344,395 shares of common stock, $0.0075 par value, outstanding.

Explanatory Note

The purpose of this Amendment No. 1 to the Quarterly Report on Form 10-Q/A is to amend portions of “Part I, Item 1. Financial Statements” previously filed in the Company’s Quarterly Report on Form 10-Q for the quarter ended September 27, 2006 and make certain other additions and conforming amendments with respect thereto. This Amendment No. 1 adjusts the Company’s Consolidated Statements of Operations for the three and nine-months ended September 27, 2006 to correct a computational error that caused the weighted average shares outstanding and loss per share amounts to be misstated in the original Form 10-Q. The weighted average shares outstanding for the three and nine-months ended September 27, 2006 should have been 16,341,916 and 11,762,608, respectively. The loss per share from continuing operations for the three and nine-months ended September 27, 2006 should have been $(0.22) and $(1.02), respectively.  The net loss per share for the three and nine-months ended September 27, 2006 should have been $(0.22) and $(1.03), respectively.  The adjustment has no impact on the Company’s net loss, Consolidated Balance Sheets or Consolidated Statements of Cash Flows that were previously filed in the original Form 10-Q. This amended Form 10-Q/A also includes additional disclosure related to these adjustments under “Item 4. Controls and Procedures” and amends the related references in the original Form 10-Q to the amounts described in this paragraph as appropriate to reflect these adjustments.

This amended Form 10-Q/A does not attempt to modify or update any other disclosures set forth in the original Form 10-Q. Additionally, this amended Form 10-Q/A speaks as of the date of the original Form 10-Q and does not update or discuss any other Company developments after the date of the original filing. All information contained in this amended Form 10-Q/A and the original Form 10-Q is subject to updating and supplementing as provided in the periodic reports that the Company has filed and will file after the original filing date with the Securities and Exchange Commission.

Tapestry Pharmaceuticals, Inc. and Subsidiaries

Table of Contents

Part I	Financial Information		3
	Item 1	Unaudited Financial Statements	3
	Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
	Item 3	Quantitative and Qualitative Disclosures about Market Risk	26
	Item 4	Controls and Procedures	26
Part II	Other Information		27
	Item 1	Legal Proceedings	27
	Item 1A	Risk Factors	27
	Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	39
	Item 3	Defaults upon Senior Securities	39
	Item 4	Submission of Matters to a Vote of Security Holders	39
	Item 5	Other Information	39
	Item 6	Exhibits	39
Signatures			40

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Part I

FINANCIAL INFORMATION

Item 1.        Financial Statements

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

	September 27,				December 28,
	2006				2005
ASSETS
Current assets:
Cash and cash equivalents		$	839			$	534
Short-term investments		27,371				13,552
Prepaid expense and other current assets		419				646
Total current assets		28,629				14,732
Property, plant and equipment, net		465				608
Investment in ChromaDex, Inc.		451				451
Other assets		664				683
Total assets		$	30,209			$	16,474
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities		$	908			$	1,024
Accrued payroll and payroll taxes		1,159				1,241
Notes payable—current portion, net		1,319				840
Total current liabilities		3,386				3,105
Notes payable—long term, net		1,384				2,483
Commitments and contingencies
Stockholders’ equity
Preferred stock, $.001 par value; 2,000,000 shares authorized; none issued		—				—
Common stock, $.0075 par value; 100,000,000 shares authorized; 16,341,916 and 3,480,704 shares issued and outstanding at September 27, 2006 and December 28, 2005, respectively		122				26
Additional paid in capital		144,692				118,278
Deferred compensation		—				(114		)
Accumulated deficit		(119,375		)		(107,262		)
Accumulated other comprehensive loss		—				(42		)
Total stockholders’ equity		25,439				10,886
Total liabilities and stockholders’ equity		$	30,209			$	16,474

See accompanying notes to Consolidated Financial Statements.

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

	Three-Months Ended							Nine-Months Ended
	September 27,			September 28,				September 27,			September 28,
	2006			2005				2006			2005
Operating expenses:
Research and development	$	2,259			$	3,139		$	7,464			$	8,718
General and administrative	1,575				1,530			5,070				4,596
Operating loss	3,834				4,669			12,534				13,314
Other income (expense):
Interest and other income	400				274			936				656
Interest and other expense	(124		)		(140		)	(427		)		(447		)
Impairment charges	—				(963		)	—				(1,067		)
Loss from continuing operations	(3,558		)		(5,498		)	(12,025		)		(14,172		)
Loss from discontinued operations	—				(43		)	(88		)		(347		)
Net loss	$	(3,558	)		$	(5,541	)	$	(12,113	)		$	(14,519	)
Basic and diluted loss per share from continuing operations (restated—Note 14)	$	(0.22	)		$	(1.61	)	$	(1.02	)		$	(4.18	)
Basic and diluted loss per share from discontinued operations	$	—			$	(0.01	)	$	(0.01	)		$	(0.10	)
Basic and diluted loss per share (restated—Note 14)	$	(0.22	)		$	(1.62	)	$	(1.03	)		$	(4.28	)
Basic and diluted weighted average shares outstanding (restated—Note 14)	16,341,916				3,423,899			11,762,608				3,393,982

See accompanying notes to Consolidated Financial Statements.

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Tapestry Pharmaceuticals, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

	Nine-Months Ended
	September 27,				September 28,
	2006				2005
Operating activities:
Net loss		$	(12,113	)		$	(14,519	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		168				197
Amortization of debt issue costs		—				92
Amortization of debt discount		382				348
Amortization of investment (discount)/premium		(272		)		198
Compensation paid with common stock		2,539				39
Retirement contributions paid with common stock		291				315
Impairment charges		—				1,067
(Gain)/loss on sale of investments		38				(72		)
Loss on disposal of assets		—				14
Changes in operating assets and liabilities:
Prepaid expense and other assets		343				128
Accounts payable and accrued liabilities		(160		)		(1,418		)
Accrued payroll and payroll taxes		(83		)		(852		)
Net cash used in operating activities		(8,867		)		(14,463		)
Investing acitivities:
Additions to property, plant and equipment		(25		)		(216		)
Proceeds from sale of assets held for sale		—				104
Purchases of investments		(59,404		)		(23,379		)
Proceeds from sale of investments		45,861				40,731
Net cash (used in) provided by investing activities		(13,568		)		17,240
Financing acitivities:
Proceeds from the sale of common stock, net of issuance costs		23,742				—
Payments of notes payable		(1,002		)		(3,474		)
Proceeds from the exercise of common stock options		—				31
Net cash provided by (used in) financing activities		22,740				(3,443		)
Net increase/(decrease) in cash and cash equivalents		305				(666		)
Cash and cash equivalents at beginning of period		534				1,713
Cash and cash equivalents at end of period		$	839			$	1,047
Supplemental disclosure of cash flow information:
Interest paid		$	—			$	137
Non-cash investing and financing activities:
Issuance of common stock to prepay retirement plan contributions		$	97			$	105

See accompanying notes to Consolidated Financial Statements.

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Tapestry Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
September 27, 2006
(Unaudited)

Note 1.Basis of Presentation and Summary of Significant Accounting Policies

In the opinion of management, the accompanying unaudited consolidated balance sheets, statements of operations and cash flows contain all adjustments, consisting of only normal, recurring adjustments, necessary to present fairly the financial position of Tapestry Pharmaceuticals, Inc. and its wholly owned subsidiaries (the “Company”) at September 27, 2006 and December 28, 2005, the results of its operations for the three and nine-months ended September 27, 2006 and September 28, 2005, and cash flows for the nine-months ended September 27, 2006 and September 28, 2005.

The unaudited consolidated financial statements presented herein have been prepared in accordance with the instructions to Form 10-Q and do not include all the information and note disclosures required by accounting principles generally accepted in the United States. The consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 28, 2005, filed with the Securities and Exchange Commission on February 23, 2006 as well as Form 10-K/A filed on March 31, 2006.

LIQUIDITY—The Company has no revenue and has incurred losses of approximately $3.6 million and $12.1 million for the three and nine-months ended September 27, 2006, respectively and a loss of approximately $17.5 million for the year ended December 28, 2005 and has an accumulated deficit of $119.4 million as of September 27, 2006. 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 September 27, 2006, the Company had cash and short-term investments totaling approximately $28.2 million. However, as of December 28, 2005 the Company had cash and short-term investments totaling approximately $14.1 million. The amount of the Company’s cash and short-term investments, as of December 28, 2005, raised substantial doubt, which has since been addressed as discussed below, about the Company’s ability to continue as a going concern. As a result of these concerns the audit report prepared by the Company’s independent registered public accounting firm relating to the Company’s consolidated financial statements for the year ended December 28, 2005 included an explanatory paragraph expressing the substantial doubt about the Company’s ability to continue as a going concern.

In late 2005 and early 2006 the Company took a number of actions to reduce its monthly cash requirements, including, among other things, reductions in workforce and related facilities and payroll costs, reductions in the growth of executive compensation, reductions in facility costs, reductions in the number of active programs in development, reductions in capital expenditures and reductions in charges from outside service providers. At that time the Company also determined that its lead pharmaceutical program warranted expanded clinical development. The Company therefore sought the additional capital necessary to fund its ongoing operations related to its lead pharmaceutical program.

On April 6, 2006, the Company sold an aggregate of 12,750,000 shares of its common stock, and related warrants to purchase up to an aggregate of 12,750,000 shares of its common stock for gross proceeds of $25.5 million not including any proceeds from the exercise of the warrants (or approximately $23.8 million net of transaction fees and expenses). As part of the financing, the Company agreed to a covenant that the net proceeds from the transaction be used solely to fund the development of its leading product candidate, TPI 287, in accordance with an approved budget for fiscal years 2006 and 2007. The

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Company may call up to 20% of the outstanding warrants during any three-month period if certain conditions are satisfied, including the trading price of the Company’s common stock exceeding $4.80 for 20 consecutive trading days. Up to half of the warrants may be exercised on a cashless or net exercise basis. There can be no assurance, however, that the Company will receive funds from the exercise of warrants. See Note 8 for further discussion.

As of September 27, 2006 the Company had cash and short-term investments of approximately $28.2 million and working capital of approximately $25.2 million. The Company believes it has sufficient capital to fund its operations and capital expenditures for at least the next 12 months. However, pharmaceutical development is costly, risky and time intensive activity. To bring the Company’s various programs to completion will require the Company to raise additional capital as practicable to fund future operations and to provide additional working capital. There can be no assurance that the Company will be able to obtain additional capital on terms that will be acceptable to the Company or on any terms. In addition, the Company may seek to acquire new products or technologies through in-licensing, purchase or merger. The cost and related capital expenditures of acquiring and developing such resources may be significant, and the Company may not be able to obtain capital for the development of these products or technologies.

ESTIMATES AND ASSUMPTIONS—The preparation of the Company’s consolidated financial statements in conformity with accounting principles generally accepted in the United States requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates are used when determining useful lives for depreciation and amortization, assessing the need for impairment charges, accounting for income taxes, estimating the value of employee stock options, and various others items. The Company evaluates these estimates and assumptions on an ongoing basis and bases its estimates on historical experience, current conditions and various other assumptions that are believed to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities as well as identifying and assessing the accounting treatment with respect to commitments and contingencies. Actual results may differ materially from these estimates.

SHARE BASED COMPENSATION—As of September 27, 2006, the Company had five equity incentive plans (the “Plans”), the 1994 Long-Term Performance Incentive Plan, the 1998 Stock Incentive Plan, the 2004 Equity Incentive Plan, the 2004 Non-Employee Director’s Stock Option Plan, and the 2006 Equity Incentive Plan (the “2006 Incentive Plan”), which was approved by shareholders on April 4, 2006.

On December 29, 2005, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, (“SFAS 123(R)”) which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock based on estimated fair values. SFAS 123(R) supersedes the Company’s previous accounting under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”). Under the provisions of APB 25 and its related interpretations, no compensation expense was recognized with respect to the grant to employees of options to purchase the Company’s common stock when such stock options were granted with exercise prices equal to or greater than market value of the underlying common stock on the date of grant.

The Company adopted SFAS 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of December 29, 2005, the first day of the Company’s 2006 fiscal year. The Company’s Consolidated Financial Statements as of and for the three and nine-months ended September 27, 2006 reflect the impact of SFAS 123(R). In accordance with the modified prospective transition method, the Company’s Consolidated Financial Statements for prior

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periods have not been restated to reflect, and do not include, the impact of SFAS 123(R). Stock-based compensation expense recognized under SFAS 123(R) for the three-months ended September 27, 2006 was $593,000 or $.03 basic and diluted loss per share from continuing operations. Stock-based compensation expense recognized under SFAS 123(R) for the nine-months ended September 27, 2006 was $2.4 million or $.20 basic and diluted loss per share from continuing operations, and $86,000 or $.01 basic and diluted loss per share from discontinued operations. Included in the stock-based compensation expense for the three and nine-months ended September 27, 2006, is a one time non-cash fixed period charge in the amount of $381,000, as a result of the modification of vested options on April 4, 2006 as discussed in Note 9. The stock-based compensation expense is calculated on a straight-line basis over the vesting periods of the related options. This charge had no impact on the Company’s reported cash flows.

For the three and nine-months ended September 28, 2005, the Company recorded approximately $15,000 and $39,000, respectively of stock compensation expense pursuant to APB 25 associated with the amortization of deferred stock compensation related to the vesting of stock options that were granted to consultants for services rendered to the Company. The breakdown of total stock-based compensation by expense category is as follows (in thousands):

	Three-Months Ended,						Nine-Months Ended,
	September 27, 2006			September 28, 2005			September 27, 2006			September 28, 2005
Research and development		$	247		$	15		$	1,035		$	29
General and adminstrative		346			—			1,328			7
Discontinued operations		—			—			86			3
		$	593		$	15		$	2,449		$	39

Under the modified prospective method of transition under SFAS 123(R), the Company is not required to restate its prior period financial statements to reflect expensing of share-based compensation under SFAS 123(R). Therefore, the results for the three and nine-months ended September 27, 2006 are not directly comparable to the same period in the prior year.

As required by SFAS 123(R), the Company has presented pro forma disclosures of its net loss and net loss per share for the prior year period assuming the estimated fair value of the options granted prior to December 29, 2005 is amortized to expense over the option-vesting period as illustrated below (in thousands):

	Three-Months Ended, September 28, 2005				Nine-Months Ended, September 28, 2005
Net loss, as reported		$	(5,541	)		$	(14,519	)
Add: Stock-based employee compensation expense included in reported net loss		15				39
Less: Total stock-based compensation expense determined under fair value based methods for all options granted		(643		)		(2,156		)
Pro forma net loss		$	(6,169	)		$	(16,636	)
Net loss per share:
Basic and diluted—as reported		$	(1.62	)		$	(4.28	)
Basic and diluted—pro forma		$	(1.80	)		$	(4.90	)

For purposes of the disclosure in the foregoing table and for purposes of determining estimated fair value under SFAS 123(R), the Company has computed the estimated fair values of all share-based compensation using the Black-Scholes option pricing model and has applied the assumptions set forth in

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the following table. The Company calculated the estimated life of each employee stock option granted in fiscal 2006 based on the average life of the option estimated by reference to the historical average lives of options issued by the Company since its initial public offering in 1994. The risk free rate of return and the historical volatility were also based on the average life of the option estimated by reference to the historical average lives of options issued by the Company since inception. As SFAS 123(R) requires that stock-based compensation expense be based on awards that are ultimately expected to vest, stock-based compensation for the three and nine-months ended September 27, 2006 have been reduced for estimated forfeitures. When estimating forfeitures, the Company takes into consideration both voluntary and involuntary terminations, as well as trends of actual option forfeitures. Prior to fiscal 2006, the Company accounted for forfeitures as they occurred.

				Weighted-
				Average
	Risk-Free	Dividend	Volatility	Option
	Interest Rate	Yield	Factor	Life (Years)
Fiscal Year 2006	4.67% - 5.18%	0%	110.00% - 121.86%	3.35 - 5.78
Fiscal Year 2005	3.58% - 4.27%	0%	113.17% - 123.33%	5

The Black-Scholes option-pricing model requires the input of highly subjective assumptions. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models may not provide a reliable single measure of the fair value of stock options granted. Management will continue to assess the assumptions and methodologies used to calculate estimated fair value of share-based compensation. Circumstances may change and additional data may become available over time, thereby resulting in changes to these assumptions and methodologies. These changes could materially impact the Company’s fair value determination.

A summary of option activity under the Plans as of September 27, 2006, and changes during the three and nine-months then ended is presented below:

Summary Details for Plan Share Options

	Three-Months Ended, September 27, 2006
	Number of Options		Weighted- Average Exercise Price			Weighted- Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value
Outstanding Balance, June 28, 2006	4,242,106			$	4.47		9.02		$	460
Granted	1,000			$	2.89		—		—
Exercised	—			—			—		—
Forfeited	(5,588	)		$	4.04		—		—
Outstanding Balance, September 27, 2006	4,237,518			$	4.47		8.77		—

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	Nine-Months Ended, September 27, 2006
	Number of Options		Weighted- Average Exercise Price			Weighted- Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value
Outstanding Balance, December 29, 2005	724,802			$	36.70		—		$	—
Granted	4,173,597			$	3.99		—		—
Exercised	—			—			—		—
Forfeited	(660,881	)		$	37.25		—		—
Outstanding Balance, September 27, 2006	4,237,518			$	4.47		8.77		—

Included in the number of stock options granted and forfeited in the table above during the nine-months ended September 27, 2006, are 626,568 stock options that were cancelled and reissued as a result of the repricing of outstanding stock options as described in Note 9.

A summary of the status of the Company unvested shares as of September 27, 2006, and changes during the three and nine-months then ended is presented below:

Unvested Shares Issued Under the Plan

	Three-Months Ended, September 27, 2006					Nine-Months Ended, September 27, 2006
	Unvested Shares		Weighted- Average Grant-Date Fair Value			Unvested Shares		Weighted- Average Grant-Date Fair Value
Beginning unvested balance	3,695,356			$	3.40	286,268			$	32.15
Granted	1,000			$	2.06	4,173,597			$	4.71
Vested	(36,558	)		$	12.83	(542,335	)		$	5.91
Forfeited	(5,400	)		$	2.93	(263,132	)		$	39.28
Ending unvested balance	3,654,398			$	3.39	3,654,398			$	3.39

Included in the number of stock options granted and forfeited in the table above during the nine-months ended September 27, 2006, are 248,856 stock options that were cancelled and reissued as a result of the repricing of outstanding stock options as described in Note 9.

On October 5, 2006, the Compensation Committee of the Board of Directors approved the grant of 1,550,000 stock options from the 2006 Incentive Plan to executive employees of the Company, including its executive officers.

As of September 27, 2006, there was $9.1 million of total unrecognized compensation expense related to unvested share-based compensation arrangements granted under the Plans. Total unrecognized compensation expense will be recognized over a weighted-average period of approximately 4.5years.

DERIVATIVE INSTRUMENTS—Companies are required to recognize all of their derivative instruments as either assets or liabilities on the balance sheet at fair value. The accounting for changes in the fair value (i.e. gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in current earnings during the period of change. The Company currently has one derivative instrument (Note 8) that is assessed on a quarterly basis, and any changes in fair value will be recognized in current earnings in the period of change.

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RECENT ACCOUNTING PRONOUNCEMENTS—On June 9, 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections. SFAS No. 154 replaces APB Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS No. 154 applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. SFAS No. 154 must be adopted for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of SFAS No. 154 did not have a material impact on the Company’s financial results.

Note 2.Reverse Stock Split and Nasdaq Listing

The Company implemented a one-for-ten reverse split of its common stock effective for trading on February 6, 2006, and all share and per share amounts for all periods presented have been restated to reflect this reverse stock split. The Company’s common stock is listed on the Nasdaq Capital Market. In order to maintain that listing, the Company must satisfy minimum financial and other requirements. On February 25, 2005, the Company received notice from the Nasdaq Stock Market, Inc. (the “Nasdaq”) that the minimum bid price of the Company’s common stock had fallen below $1.00 per share for 30 consecutive business days and such common stock was, therefore, subject to delisting from the Nasdaq Capital Market. As a result of the one-for-ten reverse split, the minimum bid price of its common stock increased and on February 24, 2006 the Company received notice from the Nasdaq that the Company regained compliance with the minimum bid price requirement.

Note 3.Discontinued Operations

In November 2004 the Company discontinued research on its remaining genomics programs, other than the Huntington’s Disease program, and sought a buyer for these programs. After attempting to sell the intellectual property assets related to the genomics programs over the course of the fourth quarter of 2004, the Company determined that there were no actively interested buyers. In the fourth quarter of 2004, the Company recorded a charge of $1.7 million primarily relating to an impairment of intangible assets acquired in connection with the December 2002 acquisition of the genomics business of Pangene Corporation ($1.1 million), a charge for fixed assets likely to be disposed of at less than their book value ($150,000), severance costs ($250,000) and lease termination costs ($200,000). Additional expenses related to the closure were charged to discontinued operations as incurred. Most costs relating to the closure were incurred by the end of January 2005, although certain lease costs continued through May 2005. In April 2005, the Company received $104,000 from the sale of certain fixed assets of the genomics business that were previously reserved for in the fourth quarter of 2004 and classified as Assets Held for Sale.

Net losses related to the Genomics Division that are included in discontinued operations totaled $0 and $43,000 for the three-months ended September 27, 2006 and September 28, 2005, respectively and $88,000 and $347,000 for the nine-months ended September 27, 2006 and September 28, 2005, respectively. No material revenue has been recognized in this division. There were no assets held for sale at September 27, 2006 and December 28, 2005, which relate to the discontinued operations of the genomics business.

Note 4.Investments

Short-term investments consist of investment grade government agency, auction rate, and corporate debt securities due within one year. The Company’s investments in auction rate securities are recorded at cost, which approximates fair market value. In accordance with ARB 43, Restatement and Revision of Accounting Research Bulletins, despite the long-term nature of their stated contractual maturities, the Company has the ability and intent to liquidate investments in auction rate securities within six months and

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therefore has classified these investments as short-term. All investments are classified as available-for-sale and are recorded at market value. Unrealized gains and losses are treated as a separate component of stockholders’ equity until the security is sold or until a decline in fair value market value is determined to be other than temporary. As of September 27, 2006 and December 28, 2005, the amortized cost basis, aggregate fair value and gross unrealized holding gains and losses by major security type of investment classified as available-for-sale are as follows (in thousands):

	Amortized			Unrealized				Fair
Security Type	Cost			Losses				Value
September 27, 2006
Auction rate securities		$	9,800		$	—		$	9,800
Commercial paper		10,946			—			10,946
Corporate debt securities		4,000			—			4,000
Government agencies		2,625			—			2,625
Total investments		$	27,371		$	—		$	27,371
December 28, 2005
Auction rate securities		$	8,750		$	—		$	8,750
Corporate debt securities		4,844			(42		)	4,802
Total investments		$	13,594		$	(42	)	$	13,552

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

	Three-Months Ended,								Nine-Months Ended,
	September 27,				September 28,				September 27,				September 28,
	2006				2005				2006				2005
Net loss, as reported		$	(3,558	)		$	(5,541	)		$	(12,113	)		$	(14,519	)
Unrealized gain (loss) on available-for-sale securities		8				16				42				(9		)
Comprehensive net loss		$	(3,550	)		$	(5,525	)		$	(12,071	)		$	(14,528	)

Note 5.Investment in ChromaDex, Inc.

In April 2003, the Company sold its technical and analytical services group to privately held ChromaDex, Inc. in exchange for approximately 15%, on a fully diluted basis, of the then outstanding common stock of ChromaDex. ChromaDex is a supplier of phytochemical reference standards for the nutraceutical, dietary supplement and functional food industries. In the third quarter of fiscal 2005, in accordance with Statement of Financial Accounting Standards No. 144 (“SFAS 144”), Accounting for the Impairment of Long-Lived Assets, the Company recognized an impairment charge of $963,000 on the carrying value of its investment in ChromaDex to revalue it to an estimated fair value of $451,000 as a result of then available financial information.

Note 6.Other Long-Term Assets—Land

As part of the Company’s preparation of its interim financial statements for the second quarter ending June 29, 2005, and in accordance with Statement of Financial Accounting Standards No. 144 (“SFAS 144”), Accounting for the Impairment of Long-Lived Assets, the Company 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.

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Note 7.Notes Payable, Current and Long-Term

On February 18, 2005, the Company entered into an agreement with TL Ventures providing for a complete settlement of its ongoing litigation with them over whether certain debentures issued to TL Ventures were subject to redemption upon completion of the sale of its paclitaxel business to Mayne Pharma, a mutual release of claims, the payment of approximately $3,184,000 in cash and the issuance by the Company of promissory notes in an aggregate amount of $4,670,000 in exchange for delivery for cancellation of debentures in the principal amount of $8,000,000 that had been issued by the Company. The notes are payable in monthly installments of $110,000 in 2006 and $150,000 in 2007, with a final payment of $1,000,000 due on January 31, 2008. The notes do not bear interest; however, an imputed interest rate of 18% was used to determine a fair carrying value of the notes. Accrued interest of approximately $134,000 was included in the cash payment made as part of the settlement. The Company recorded the obligation resulting from the settlement on its balance sheet as of December 29, 2004.

Note 8.Stockholders’ Equity

In September 2005, the Company initiated a retention incentive program for non-executive employees that consisted of a grant of approximately 43,814 shares of restricted stock under the Company’s equity incentive plans to vest at future dates, as well as a cash component related to the individual tax effects of the program. To date, under this program, 5,256 shares have been surrendered due to employees leaving employment with the Company. The stock component of the program includes 18,463 shares that vested on September 6, 2006 and 20,095 additional shares to vest on September 6, 2007, contingent upon participants being employed by the Company on those dates. The total value of the common stock component of the program is $139,000 (net of terminations) based on the fair value of the underlying common stock at the date of grant. The cash component related to the tax effects of the program amounted to $93,000 and was expensed in the third quarter of 2005. For the three and nine-months ended September 27, 2006, $20,000 and $69,000, respectively, of expense related to the program was recognized. As a result of the adoption of SFAS 123(R), the deferred compensation balance has been eliminated against additional paid in capital. The remaining unamortized expense associated with the program of $33,000 will be recognized over the vesting period through September 2007.

On April 6, 2006, the Company sold an aggregate of 12,750,000 shares of common stock and warrants to purchase up to 12,750,000 shares of common stock (the “Private Placement”), for a total of $25.5 million (excluding any proceeds that might be received upon exercise of the warrants) or approximately $23.8 million, net of the placement agent fees and other expenses, pursuant to a Purchase Agreement dated February 2, 2006 (the “Purchase Agreement). The purchase price was $2.00 per share of common stock, and each warrant to purchase common stock has an exercise price equal to $2.40 per share. The Company may call up to 20% of the outstanding warrants during any three month period if certain conditions are satisfied, including the trading price of the Company’s common stock exceeding $4.80 for 20 consecutive trading days. Up to half of the warrants may be exercised on a cashless or net exercise basis. There can be no assurance, however, that the Company will receive funds from the exercise of warrants.

In addition, the Company issued warrants to purchase 50,000 shares of common stock to a financial advisor and issued warrants to purchase 100,000 shares of common stock to an outside consultant as a finders’ fee on substantially similar terms as the warrants issued under the Purchase Agreement.

Pursuant to the terms of the registration rights agreement entered into by the Company at the closing of the Private Placement, the Company filed with the SEC a registration statement on Form S-3 covering the resale of the common stock sold to investors in the Private Placement. The registration rights agreement provides, among other things, that the Company will use commercially reasonable efforts to effect the registration of the securities within 90 days of closing, and to continuously maintain effectiveness. If sales cannot be made under the registration statement (other than for certain periods

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when the Company is permitted under the agreement to suspend use of the registration statement when it has delayed disclosure of material nonpublic information) then the Company is obligated to pay each investor liquidated damages, in cash, equal to 1.5% per 30 day period (or pro rata for a portion thereof) of the aggregate purchase price paid by such investor. The SEC declared the Company’s Form S-3 effective on May 18, 2006, which was within 90 days of closing.

The Company views the registration rights agreement containing the liquidated damages provision as a separate freestanding contract as discussed in Emerging Issues Task Force (“EITF”) Issue No. 05-4, The Effect of a Liquidated Damages Clause on a Freestanding Financial Instrument Subject to EITF Issue No. 00-19, ‘Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock(“EITF 05-4”)’, and that the registration rights agreement has nominal value. Under this approach, the registration rights agreement is accounted for separately from the financial instrument in accordance with SFAS 133 “Accounting for Derivative Instruments and Hedging Activities”. Accordingly, the classification of the warrants has been determined under EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock,” and the warrants have been accounted for as permanent equity.

The Company has valued the liquidated damages provision of the registration rights agreement at nominal value. In determining this as the fair value, the Company considered the following factors. The agreement provides that there is a 90-day period to have the registration statement declared effective before liquidated damages apply. The Company believed at the closing of the Private Placement it was probable the registration statement would be declared effective within the 90-day period. The registration statement was declared effective in less than 90 days and in the same fiscal quarter as the closing of the private placement, and therefore the Company was aware that there was no value to the liquidate damages provision for the initial 90 day period. The liquidated damages provision would only have value in the future if sales may not be made thereunder for periods other than as permitted thereunder. The Company believes the events that would lead to sales being unable to be made under the registration statement for periods other than as permitted are unlikely to occur. In future periods, should the Company conclude that it is probable, as defined in SFAS No. 5, “Accounting for Contingencies,” that a liability for liquidated damages will occur, the Company will record the estimated cash value of the liquidated damages liability at that time.

Note 9.Equity Incentive Plans

As of September 27, 2006, the Company had five equity incentive plans, the 1994 Long-Term Performance Incentive Plan, the 1998 Stock Incentive Plan, the 2004 Equity Incentive Plan, the 2004 Non-Employee Director’s Stock Option Plan and the 2006 Equity Incentive Plan, which was approved by shareholders on April 4, 2006.

2006 Equity Incentive Plan and New Stock Option Grants

In January 2006, the Board of Directors adopted, subject to stockholder approval, the Company’s 2006 Equity Incentive Plan. The Board adopted the 2006 Incentive Plan at the same time it approved the Private Placement. In conjunction with the adoption of the 2006 Incentive Plan, and subject to stockholder approval, the Board granted options to purchase 30,000 shares of common stock to each non-employee director of the Board totaling 180,000 shares. In addition, subject to stockholder approval, the Compensation Committee of the Board of Directors (“Compensation Committee”) granted options to purchase shares of common stock to employees of the Company, including its executive officers, totaling 3,079,480 shares. Stockholder approval for the 2006 Incentive Plan and grant of the stock options thereunder was received on April 4, 2006.

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The number of shares initially reserved for issuance under the 2006 Incentive Plan totals 6,577,106. Subject to limited exceptions, the grant date for the each of the options, as discussed above, is April 4, 2006. The exercise price of such options is $4.02 and was established as the average of the closing sale prices of the Company’s common stock on the Nasdaq Capital Market on the fourth through eighth trading days following the Company’s announcement of the Private Placement. The resulting exercise price of $4.02 was above the closing sales price of the Company’s common stock on April 4, 2006. Each option vests as follows: 1¤6 when the 20 trading day average of the closing sale prices of the common stock equals or exceeds 130% (or $5.23) of the exercise price of the stock option; 1¤6 when such average equals or exceed 160% (or $6.43) of the exercise price; 1¤6 when such average equals or exceeds 190% (or $7.64) of the exercise price; 1¤6 when such average equals or exceeds 220% (or $8.84) of the exercise price; 1¤6 when such average equals or exceeds 250% (or $10.05) of the exercise price; and 1¤6 when such average equals or exceeds 300% (or $12.06) of the exercise price. All stock options vest at the latest on the fifth anniversary of the date of grant. The awards otherwise were made in accordance with the terms and conditions of the 2006 Incentive Plan and the Form of Stock Option Agreement for grants thereunder.

On October 5, 2006, the Compensation Committee of the Board of Directors approved the grant of 1,550,000 stock options from the 2006 Incentive Plan to executive employees of the Company, including its executive officers.

Repricing of Stock Options

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

After giving effect to the above transactions, as of October 5, 2006 the total number of common shares authorized for issuance related to grants under all of the equity incentive plans was 6,577,106, of which 5,787,468 options (excluding 50 options issued outside of the above plans) remain outstanding and 789,588 shares remain reserved for future grants.

Note 10.Reduction in Operations

During the third quarter of 2005, the Company incurred severance costs of $299,000 associated with the elimination of two executive positions, five general and administrative positions and 15 research and development positions (including one consultant).

Note 11.Income Taxes

At December 29, 2005, the Company had available net operating loss and research and development credit carryforwards of $100.8 million and $3.9 million, respectively, for income tax purposes. The Tax Reform Act of 1986 contains provisions that limit the utilization of net operating loss and tax credit carryforwards if there has been a change of ownership, as described in Section 382 of the Internal Revenue Code. As a result of the private placement of equity securities in April, 2006, which the Company considers a change of ownership for tax purposes, the Company believes that there are substantial limitations on the utilization of its net operating loss and tax credit carryforwards.

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Note 12.Net Income (Loss) Per Share

Basic earnings (loss) per share is measured as net income or loss divided by the weighted average outstanding common shares for the period. Diluted earnings per share is similar to basic earnings per share but presents the dilutive effect on a per share basis of potential common shares (e.g. stock options, warrants and convertible securities) as if they had been converted at the beginning of the periods presented. Potential common shares that have an antidilutive effect are excluded from diluted earnings per share (e.g. vested stock options and warrants that could be converted representing 12,917,900 shares at September 27, 2006 and 568 shares at September 28, 2005). Net loss per common share is computed using the weighted average number of shares of common stock outstanding.

Note 13.Settlement Agreement

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

Note 14.Weighted Average Shares Outstanding and Loss Per Share Adjustment

The Company determined that a computational error caused the weighted average shares outstanding and loss per share amounts as reported to be misstated. As such, the unaudited three and nine-months ended September 27, 2006 financial information as previously reported has been adjusted below. The adjustment has no impact on the net loss for the three and nine-months ended September 27, 2006, Consolidated Balance Sheets or Consolidated Statements of Cash Flows.

	Three-Months Ended, September 27, 2006
	Previously					As
	Reported			Adjustment		Restated
Operating expenses:
Research and development	$	2,259				$	2,259
General and administrative	1,575					1,575
Operating loss	3,834			—		3,834
Other income (expense):
Interest and other income	400					400
Interest and other expense	(124		)			(124		)
Impairment charges	—					—
Loss from continuing operations	(3,558		)	—		(3,558		)
Loss from discontinued operations	—			—		—
Net loss	$	(3,558	)	0		$	(3,558	)
Basic and diluted loss per share from continuing operations	$	(0.24	)	$	0.02	$	(0.22	)
Basic and diluted loss per share from discontinued operations	$	—		$	—	$	—
Basic and diluted loss per share	$	(0.24	)	$	0.02	$	(0.22	)
Basic and diluted weighted average shares outstanding	15,051,659			1,290,257		16,341,916

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	Nine- Months Ended, September 27, 2006
	Previously					As
	Reported			Adjustment		Restated
Operating expenses:
Research and development	$	7,464				$	7,464
General and administrative	5,070					5,070
Operating loss	12,534			—		12,534
Other income (expense):
Interest and other income	936					936
Interest and other expense	(427		)			(427		)
Impairment charges	—					—
Loss from continuing operations	(12,025		)	—		(12,025		)
Loss from discontinued operations	(88		)	—		(88		)
Net loss	$	(12,113	)	0		$	(12,113	)
Basic and diluted loss per share from continuing operations	$	(1.95	)	$	0.93	$	(1.02	)
Basic and diluted loss per share from discontinued operations	$	(0.01	)	$	—	$	(0.01	)
Basic and diluted loss per share	$	(1.96	)	$	0.93	$	(1.03	)
Basic and diluted weighted average shares outstanding	6,178,875			5,583,733		11,762,608

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

The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of the results of operations of Tapestry Pharmaceuticals, Inc. You should read this discussion in conjunction with the Financial Statements and Notes included elsewhere in this report and with Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 28, 2005 contained in our 2005 Annual Report on Form 10-K and Form 10-K/A. Certain statements set forth below constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. See “Special Note Regarding Forward-Looking Statements” and “Risk Factors” appearing elsewhere in this Report.

General

Tapestry Pharmaceuticals, Inc. (“we,” “Tapestry” or “the Company”) is a pharmaceutical company focused on the development of proprietary therapies for the treatment of cancer. Our primary development effort is focused on TPI 287, a novel taxane under development for the treatment of cancer. We filed an Investigational New Drug (“IND”) application on December 21, 2004 covering TPI 287, and commenced human clinical trials with TPI 287 in the second quarter of 2005. We are also actively engaged in evaluating new therapeutic agents and/or related technologies. Our evaluation of new products and technologies may involve the examination of individual molecules, classes of compounds or platform technologies. Acquisitions of new products or technologies may involve the purchase or license of such products or technologies, or the acquisition of, or merger with, other companies.

On April 6, 2006, we sold an aggregate of 12,750,000 shares of common stock and warrants to purchase up to 12,750,000 shares of common stock (the “Private Placement”), for a total of $25.5 million (excluding any proceeds that might be received upon exercise of the warrants) or approximately $23.8 million, net of the placement agent fees and other expenses. The purchase price was $2.00 per share of common stock, and each warrant to purchase common stock has an exercise price equal to $2.40 per share. We may call up to 20% of the outstanding warrants during any three month period if certain conditions are satisfied, including the trading price of our common stock exceeding $4.80 for 20 consecutive trading days. Up to half of the warrants may be exercised on a cashless or net exercise basis. There can be no assurance, however, that we will receive funds from the exercise of warrants.

In November 2004 we discontinued research on our genomics programs, other than the Huntington’s Disease program, and sought a buyer of these programs. After attempting to sell the intellectual property assets related to the genomics programs over the course of the fourth quarter of 2004, we determined that there were no actively interested buyers and we proceeded to effect an orderly closure of such operations, which was substantially completed by January 2005. In January 2006, we terminated the Oligo Therapy program related to Huntington’s Disease and the development of TPI 284, a linked cytotoxic compound. In June 2006, we discontinued the study of quassinoid analogs.

During the third quarter of 2005, we incurred severance costs of $299,000 associated with the elimination of two executive positions, five other general and administrative positions and 15 research and development positions (including one consultant).

During the first quarter of 2006, the Company and Dr. Patricia Pilia entered into a Settlement Agreement (the “Settlement Agreement”) in connection with Dr. Pilia’s termination of employment by the Company without cause on February 23, 2006. Dr. Pilia is a member of the Board of Directors and previously served as Executive Vice President and Secretary of the Company and was party to an employment agreement with the Company. In connection with the Settlement Agreement, we recorded an obligation of $646,000 for termination benefits at March 29, 2006 that was paid in the third quarter of fiscal 2006.

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We will incur substantial research and development expense, including expense for clinical trials related to the development of our proprietary anti-cancer agents. We have incurred significant losses, including losses from continuing operations of $12.0 million for the nine-months ended September 27, 2006. Our accumulated deficit was $119.4 million as of September 27, 2006. As a result of our implementation of SFAS 123(R), for the nine-months ended September 27, 2006, operating expenses were increased by non-cash compensation charges totaling $2.5 million, including one-time non-cash fixed period charge in the amount of $381,000 relating to the modifications of vested stock options. We anticipate that losses will continue until such time, if ever, as we are able to commercialize our product candidates and generate sufficient sales to support our development operations, including the research and development activity mentioned above.

Our ability to generate sufficient sales to support our operations currently depends upon the successful development and commercialization of products based on our proprietary oncology technologies.

Research and Development

Our current business is focused primarily on the clinical development of TPI 287, along with limited research and development of other proprietary therapies for the treatment of cancer. The table below shows our research and development expense by major category, with the expense related to our Genomics Division included in discontinued operations (in thousands):

	Three-Months Ended,						Nine-Months Ended,
	September 27,			September 28,			September 27,				September 28,
	2006			2005			2006				2005
Oncology		$	2,259		$	2,918		$	7,554			$	8,150
Huntington’s Disease		—			221			(90		)		568
Discontinued operations		—			43			88				392
		$	2,259		$	3,182		$	7,552			$	9,110

The following chart identifies our three therapeutic candidate programs that are in the 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	Various Solid Tumors	Preclinical Development
Linked Cytotoxics	Cancers	Research

We terminated the Oligo Therapy program related to Huntington’s Disease in January 2006. We also terminated the development of TPI 284, a linked cytotoxic compound, in January 2006 and we discontinued the study of quassinoid analogs in June 2006. We are continuing limited research relating to linked cytotoxic agents.

•  TPI 287 is a proprietary third generation taxane. On December 21, 2004, we filed an Investigational New Drug (“IND”) application, and on January 21, 2005, we were cleared to proceed into clinical trials by the U.S. Food and Drug Administration (“FDA”). In May 2005, we treated our first patient in a once every 7 day Phase I clinical trial of the intravenous (“IV”) formulation of TPI 287. In January 2006, we began a second Phase I clinical trial of TPI 287 IV to evaluate an alternative dosing schedule. In preclinical testing, TPI 287 demonstrated the ability to inhibit tumor cell growth in a number of in vitro cell lines and showed inhibition of tumors in certain animal xenograft models when tested against standard comparative agents. The in vitro activity was seen across multiple cell lines including cell lines known to be sensitive to taxanes and cell lines known to be resistant to taxanes. Taxane sensitive cell lines in which TPI 287 shows activity include cell lines derived from

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breast cancer, uterine cancer and non-small cell lung cancer. Taxane resistant cell lines in which TPI 287 has shown activity include cell lines derived from breast cancer, colon cancer and prostate cancer. In in vivo animal testing, TPI 287 demonstrated tumor growth inhibition activity in tumor cell lines with mutant tubulin and multiple drug resistance, or MDR1.

·  In October 2006, we reached the maximum tolerated dose (MTD”) in our once every 21 day Phase I trial. We continue to add patients in this Phase I trial at the MTD to provide us with additional clinical experience with TPI 287 at this dosing schedule. In addition, we are continuing to recruit patients in our once every 7 day Phase I trial and hope to reach MTD in this study by the end of 2006. We expect to begin treating patients in our first Phase II trials of TPI 287 in both prostate and non-small cell lung cancer in the first quarter of fiscal 2007. Additional Phase II studies in other indications will follow thereafter. Our Phase II trials are designed to determine in what tumor type our compound might be advanced for Phase III studies, if any. As we recruit patients for these first Phase II studies, and others to follow, we will see an increase in our clinical spending.

Certain Risks and Limitations.The clinical development of these drugs has many risks of failure. We have included a discussion of a number of the risks and uncertainties associated with completing our product development plans under “Risk Factors”.

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

Results of Operations—Three-Months Ended September 27, 2006 Compared to the Three-Months Ended September 28, 2005

Research and Development Expense.Research and development expense from continuing operations for the three-months ended September 27, 2006 was $2.3 million, a decrease of $880,000 from the prior year period. Oncology research and development expenditures decreased by $659,000 to $2.3 million in the three-months ended September 27, 2006, and Huntington’s Disease related spending decreased by $221,000 to $0.

The decrease in oncology expense was primarily due to decreased compensation costs ($250,000), decreased manufacturing costs of ($660,000) and decreased toxicology costs of ($100,000), offset by increased supplies costs ($359,000). The decrease in expense related to the Huntington’s Disease program was a result of the termination of the program in January 2006. Included in research and development expense is a non-cash compensation expense in the amount of $259,000 and $14,000 for the quarter ended September 27, 2006 and September 28, 2005, respectively, as a result of the implementation of SFAS 123(R) and the modification of vested stock options that was partially offset by lower salary expense due to the staffing reductions in July 2005.

General and Administrative Expense.General and administrative expense for the three-months ended September 27, 2006 was $1.6 million, an increase of $45,000 from the prior year period.

This increase was due primarily due to increased compensation costs ($236,000), as well as increased Board of Directors costs ($44,000), partially offset by decreases in other consulting expense ($31,000), accounting and auditing expense ($40,000), outside legal expense ($29,000), other outside services ($89,000) as well as insurance ($45,000). The increase in compensation related expenses, which includes Board of Directors costs, was primarily the result of non-cash compensation expense in the amount of $356,000 and $0 for the quarter ended September 27, 2006 and September 28, 2005, respectively, as a result of the implementation of SFAS 123(R) and the modification of vested stock options which was partially offset by lower salary expense due to the staffing reductions in July 2005.

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Interest and Other Income.Interest and other income for the three-months ended September 27, 2006 of $400,000 represented an increase of $126,000 compared to the prior year period. The increase was attributable to higher interest income due to higher investment balances as well as higher effective interest rates earned in the three-months ended September 27, 2006 compared to the prior year period.

Interest and Other Expense.Interest and other expense for the three-months ended September 27, 2006 of $124,000 was $16,000 less than the prior year period due to the reduction in principal of the note payable to TL Ventures.

Impairment Charges.Impairment charges for the three-months ended September 28, 2005 of $963,000 were the result of a revaluation of our investment in ChromaDex (see Note 5). There were no impairment charges in the current year quarter.

Discontinued Operations.Loss from discontinued operations was $0 for the three-months ended September 27, 2006 compared to a loss of $43,000 in the prior year period. This decrease is the result of there being no activity in the Genomics Division in the current quarter.

Results of Operations—Nine-Months Ended September 27, 2006 Compared to the Nine-Months Ended September 28, 2005

Research and Development Expense.Research and development expense from continuing operations for the nine-months ended September 27, 2006 was $7.5 million, a decrease of $1.3 million from the prior year period. Oncology research and development expenditures decreased by $596,000 to $7.6 million for the nine-months ended September 27, 2006, and Huntington’s Disease related spending decreased by $658,000 to ($90,000).

The decrease in oncology expense was due to an increase in compensation costs ($676,000), increased clinical trial cost ($232,000) as well as increased supplies costs of ($377,000), offset by reductions in outside manufacturing costs ($1.4 million) associated with preparing active pharmaceutical ingredient and drug product material for the clinical trials of TPI 287, a decrease in consulting and other outside service costs ($419,000) and a decrease in occupancy costs ($68,000).

The increase in compensation expense in the nine-months ended September 27, 2006 was primarily related to the non-cash compensation expense in the amount of $1.0 million for the nine-months ended September 27, 2006 compared to $32,000 for the nine-months ended September 28, 2005, respectively, as a result of the implementation of SFAS 123(R) and the modifications of vested stock options. In addition, in the first quarter of 2006, we recorded a $646,000 charge as a result of the employment agreement settlement due to the termination of the employment of the Company’s Executive Vice President and Secretary. These increases were offset by lower salary expense due to the staffing reductions in July 2005.

The decrease in expense related to the Huntington’s Disease program was a result of a reversal of laboratory fees owed to the University of Delaware as well as the reduction in work force.

General and Administrative Expense.General and administrative expense for the nine-months ended September 27, 2006 was $5.1 million, an increase of $474,000 from the same period in 2005. This increase was due to higher compensation related costs ($849,000) and Board of Directors costs ($164,000) offset by lower insurance costs ($119,000), lower outside legal costs ($122,000), lower outside accounting and auditing costs $(81,000), lower travel costs ($31,000), and lower outside service costs related to investor relations ($157,000). The increase in compensation related expenses, including Board of Director costs, was primarily the result of non-cash compensation expense in the amount of $1.3 million and $7,000 for the nine-months ended September 27, 2006 and September 28, 2005, respectively, as a result of the implementation of SFAS 123(R) and the modification of vested stock options, offset by lower salary expense due to the staffing reductions in July 2005.

Interest and Other Income.Interest and other income for the nine-months ended September 27, 2006 of $936,000 represented an increase of $280,000 compared to the prior year period. The increase was

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attributable to higher interest income due to higher investment balances and higher effective interest rates earned in the nine-months ended September 27, 2006 compared to the prior year period.

Interest and Other Expense.Interest and other expense for the nine-months ended September 27, 2006 of $427,000 was $20,000 less than the prior year period due to the reduction in principal of the note payable to TL Ventures.

Impairment Charges.Impairment charges for the nine-months ended September 28, 2005 of $1.1 million were primarily the result of a revaluation of our investment in ChromaDex (see Note 5) in the amount of $963,000 and a reduction in value of our land (see Note 6) in the amount of $104,000. There were no impairment charges in the current year period.

Discontinued Operations.Loss from discontinued operations was $88,000 for the nine-months ended September 27, 2006 compared to a loss of $347,000 in the prior year period. This decrease is primarily a result of there being no activity in the Genomics Division in the nine-months ended September 27, 2006, except for non-cash compensation expense in the amount of $86,000 as a result of the implementation of SFAS 123(R), as compared to salary, occupancy and patent related charges in the prior year period.

Share Based Compensation.Effective December 29, 2005, we adopted the fair value method of accounting for share-based compensation arrangements in accordance with Financial Accounting Standards Board (“FASB”) Statement No. 123(R), Share-Based Payment (“SFAS 123(R)”), using the modified prospective method of transition. Under the provisions of SFAS 123(R), the estimated fair value of options granted under our various equity incentive plans is recognized as compensation expense over the option-vesting period. Using the modified prospective method, compensation expense is recognized beginning with the effective date of adoption of SFAS 123(R) for all share-based payments (i) granted after the effective date of adoption and (ii) granted prior to the effective date of adoption and that remain unvested on the date of adoption. We are not required to restate our prior period financial statements to reflect expensing of share based compensation under SFAS 123(R). Therefore, the results for the three and nine-months ended September 27, 2006 are not directly comparable to the same period in 2005.

Prior to December 29, 2005, we accounted for stock-based employee compensation plans using the intrinsic value method of accounting in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), and its related interpretations. Under the provisions of APB 25, no compensation expense was recognized when stock options were granted with exercise prices equal to or greater than market value on the date of grant.

In accordance with the provisions of SFAS 123(R), for the three-months ended September 27, 2006, there was approximately $593,000, or $.03 basic and diluted loss per share from continuing operations of option related compensation expense which was allocated among research and development ($247,000) and general and administrative ($346,000) based on the function of the employee option holder. For the nine-months ended September 27, 2006, there was approximately $2.4 million, or $.20 basic and diluted loss per share from continuing operations of option related compensation expense which was allocated among research and development ($1.1 million) and general and administrative ($1.3 million). Included in stock-based compensation expense for the nine-months ended September 27, 2006, is a one-time non-cash fixed period charge in the amount of $381,000, respectively, as a result of the modification of vested shares on April 4, 2006, as discussed in Note 9 to our unaudited financial statements included elsewhere in the report. As of September 27, 2006, unrecognized compensation expense related to unvested share-based compensation arrangements granted under the various equity incentive plans totaled approximately $9.1 million.

Liquidity and Capital Resources

Our working capital requirements for research and development have been, and will continue to be, significant. As of September 27, 2006 we had working capital of $25.2 million compared to working capital

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of $11.6 million at December 28, 2005. Through September 27, 2006, we have funded our capital requirements primarily with the net proceeds of public offerings of common stock, with private placements of equity securities, with the exercise of warrants and options and with debt. We also have funded our capital requirements from the gross proceeds of the sale of our paclitaxel business (approximately $71.7 million) to Mayne Pharma (USA) Inc. (f/k/a Faulding Pharmaceutical, Inc.) (“Mayne Pharma”), a subsidiary of Mayne Group Limited, on December 12, 2003 and its operations prior to that date.

Cash and cash equivalents increased $305,000 to $839,000 at September 27, 2006 from $534,000 at December 28, 2005. As of September 27, 2006, cash, cash equivalents and short-term investments increased $14.1 million to $28.2 million from $14.1 million at December 28, 2005. The increase was primarily due to $22.7 million of net cash provided by financing activities offset by $8.9 million of net cash used by operating activities and $13.6 million of net cash used by investing activities.

Private Placement

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

In addition, we issued warrants to purchase 50,000 shares of common stock to a financial advisor and issued warrants to purchase 100,000 shares of common stock to an outside consultant as a finders’ fee on substantially similar terms as the warrants issued under the Purchase Agreement.

In connection with the Private Placement, we entered into a registration rights agreement wherein we agreed to make the requisite SEC filings to achieve and substantially maintain the effectiveness of a registration statement covering shares sold in the Private Placement. If the Company failed to file a required registration statement or to achieve or substantially maintain the effectiveness of a required registration statement during the related period (subject to the Company’s right to suspend use of the registration statement in certain circumstances), we will be obligated to pay liquidated damages in an amount up to 1.5% of the $25.5 million purchase price paid by investors for each 30 day period or pro rata for any portion thereof in excess of our allotted time. On May 4, 2006, we filed a registration statement on Form S-3 to register the resale of the shares sold in the Private Placement as well as the shares underlying the warrants issued in the Private Placement and the warrants issued to financial advisors and consultants in conjunction with the Private Placement. This registration statement was declared effective by the Securities and Exchange Commission on May 18, 2006. We are now required to maintain the effectiveness of the registration statement, subject to certain exceptions, through the period the warrants are outstanding and up to an additional two years for a maximum period of seven years through April 6, 2013.

Note Payable

In connection with the February 18, 2005 settlement of litigation with TL Ventures over whether certain debentures issued to TL Ventures were subject to redemption upon completion of the sale of our paclitaxel business to Mayne Pharma, we paid approximately $3,184,000 in cash and issued promissory notes in the amount of $4,670,000 in exchange for the delivery of the debentures by TL Ventures to the Company for cancellation. The notes do not bear 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. Accrued

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interest of approximately $134,000 was included in the cash payment made as part of the settlement. We recorded the obligation resulting from the settlement on our balance sheet as of December 29, 2004. We imputed an interest rate of 18% on the notes. No gain or loss was recognized in connection with the settlement.

Going Concern

We have no revenue and we incurred a loss of approximately $3.6 million and $12.1 million for the three and nine-months ended September 27, 2006, respectively and a loss of approximately $17.5 million for the year ended December 28, 2005 and we have an accumulated deficit of $119.4 million as of September 27, 2006. Our capital requirements for research and development, including the cost of clinical trials, have been and will continue to be significant.

As of September 27, 2006, we had cash and short-term investments totaling approximately $28.2 million. However, as of December 28, 2005 we had cash and short-term investments totaling approximately 14.1 million. The amount of the Company’s cash and short-term investments, as of December 28, 2005, raised substantial doubt, which has since been addressed, as discussed below, about our ability to continue as a going concern. The audit report prepared by our independent registered public accounting firm relating to our consolidated financial statements for the year ended December 28, 2005 included an explanatory paragraph expressing the substantial doubt about our ability to continue as a going concern.

In late 2005 and early 2006 we undertook a number of actions to reduce our monthly cash requirements, including, among other things, reductions in workforce and related payroll costs, reductions in facility costs, reductions in the number of active programs in development, reductions in capital expenditures and reductions in charges from outside service providers. After implementing these and other cost savings measures and further determining that our lead pharmaceutical program warranted expanded clinical development, we determined to seek the additional capital necessary to fund our ongoing operations related to our lead pharmaceutical program.

On April 6, 2006, we closed the Private Placement, as described above. As of September 27, 2006 we have cash and short-term investments of approximately $28.2 million and working capital of approximately $25.2 million. We believe we have sufficient capital to fund our operations and capital expenditures for at least the next 12 months. However, pharmaceutical development is costly, risky and time intensive activity. To bring our various programs to completion will require us to raise additional capital as practicable to fund future operations and to provide additional working capital. There can be no assurance that we will be able to obtain additional capital on terms that will be acceptable to us or on any terms. In addition, we may seek to in-license or purchase new products or technologies. The cost and related capital expenditures of acquiring and developing such resources may be significant, and we may not be able to obtain capital for the development of these products or technologies.

Reverse Stock Split and Nasdaq Listing

We implemented a one-for-ten reverse split of our common stock effective for trading on February 6, 2006, and all share and per share amounts for all periods presented have been restated to reflect this reverse stock split. Our common stock is listed on the Nasdaq Capital Market. In order to maintain that listing, we must satisfy minimum financial and other requirements. On February 25, 2005, we received notice from the Nasdaq Stock Market, Inc. that the minimum bid price of our common stock had fallen below $1.00 per share for 30 consecutive business days and that our common stock was, therefore, subject to delisting from the Nasdaq Capital Market. As a result of the one-for-ten reverse split, the minimum bid price of our common stock increased and on February 24, 2006, we received notice from the Nasdaq Stock Market, Inc. that we regained compliance with the minimum bid price requirement.

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Recent Accounting Pronouncements

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

Special Note Regarding Forward-Looking Statements

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

·  statements concerning the success of TPI 287 in clinical trials and our ability to pursue additional clinical trials relating to TPI 287, and the timing of any such further clinical development;

·  statements concerning our plans, objectives and future economic prospects, such as matters relative to developing new products;

·  the availability of patent and other protection for our intellectual property;

·  the completion of preclinical studies, clinical trials and regulatory filings;

·  the prospects for, and timing of, regulatory and institutional review board approvals;

·  the need and plans for, and availability of, additional capital;

·  the amount and timing of capital expenditures;

·  the ability to outsource activities;

·  the future acquisition of technology, products or business entities;

·  prospects for future operations; and

·  other statements of expectations, beliefs, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts.

Such forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance or achievements, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those described below under “Risk Factors” identified in Item 1A of Part II of this Report. As a result, you should not place undue reliance on these forward-looking statements, which apply only as of the date of this report. Should one or more of these risks materialize (or the consequences of such a development worsen), or should the underlying assumptions prove incorrect, actual results could differ materially from those forecasted or expected. We undertake no obligation to update any of the forward-looking statements after the date of this Report to conform such statements to actual results.

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Item 3.        Quantitative and Qualitative Disclosures about Market Risk

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

Item 4.        Controls and Procedures

The Company maintains a system of disclosure controls and procedures. The term “disclosure controls and procedures,” as defined by regulations of the SEC, means controls and other procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits to the SEC under the Securities Exchange Act of 1934, as amended (“the Act”), is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits to the SEC under the Act is accumulated and communicated to the Company’s management, including its Principal Executive Officer and its Principal Financial Officer, as appropriate to allow timely decisions to be made regarding required disclosure. The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of September 27, 2006. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective as of September 27, 2006 because of the material weakness described below.

As of September 27, 2006, we determined that we did not maintain effective control over the completeness and accuracy of the supporting schedule of weighted average shares outstanding. Specifically, our supervisory review and approval controls did not detect a computational error in the weighted average shares outstanding calculation. This control deficiency made it necessary to restate the Consolidated Statements of Operations included in this Form 10-Q/A. Management has concluded that this control deficiency constitutes a material weakness in internal control over financial reporting. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements, including the related disclosures, will not be prevented or detected. Management has implemented additional controls and procedures relating to the preparation of the supporting schedule of weighted average shares outstanding, including formalization of policies and procedures regarding the preparation and supervisory review of the condensed consolidating financial information. Such policies and procedures include the implementation of check totals and analytical analyses to increase accuracy, as well as two levels of review of the supporting schedules from which it was derived, which management believes will remediate the material weakness described above.

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

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Part II—Other Information

Item 1.        Legal Proceedings

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

Item 1A      Risk Factors

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

Risks Related to Our Business

We currently are focusing our development efforts on only one product candidate, TPI 287, and we will have limited prospects for successful operations if TPI 287 does not prove successful in clinical trials or is never commercialized because of the costs of continuing development or for other reasons.

In 2005, we closed our Genomics division, and in 2006, we terminated our program relating to Huntington’s Disease and terminated development of TPI 284 as well as we discontinued the study of quassinoid analogs. These actions have permitted us to focus our development efforts primarily on the development of TPI 287, which is still in Phase I clinical trials. Our other product candidates are in preclinical development and we have no products that are approved for commercial sale. TPI 287 will require extensive additional clinical evaluation, regulatory review, marketing efforts and significant investment before we receive any revenues from it, if ever. We currently do not have the capital resources necessary to bring any of our product candidates through to commercial approval, and we do not expect TPI 287 or any of our other product candidates or technologies to be commercially available for several years. We believe that our recently consummated financing will only be sufficient to permit us to generate preliminary Phase II data on TPI 287 in a number of tumor types. Our efforts may not lead to commercially successful products for a number of reasons, including the inability to be proven safe and effective in clinical trials, the lack of regulatory approvals or obtaining regulatory approvals that are narrower than we seek, inadequate financial resources to complete the development and commercialization of our product candidates or the lack of acceptance in the marketplace. Given the limited focus on one product candidate, if TPI 287 does not prove successful in clinical trials or is not commercialized because we have insufficient resources for continued development for any other reason, we may be required to suspend or discontinue our operations and you could lose your entire investment in the Company.

If we fail to obtain the capital necessary to fund our operations when needed, we could be forced to discontinue our operations.

The audit report prepared by our independent registered public accounting firm relating to our consolidated financial statements for the year ended December 28, 2005 includes an explanatory paragraph expressing the substantial doubt about our ability to continue as a going concern. We have undertaken a number of actions to reduce our monthly cash requirements, including, among other things, reductions in workforce and related payroll costs, reductions in facility costs, reductions in the number of active programs in development, reductions in capital expenditures and reductions in charges from outside service providers. After implementing these and other cost savings measures and further determining that our lead pharmaceutical program warranted expanded clinical development, we determined that we should

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seek the additional capital necessary to fund our ongoing operations related to our lead pharmaceutical program.

On April 6, 2006, we sold an aggregate of 12,750,000 shares of our common stock, and related warrants to purchase up to an aggregate of 12,750,000 shares of our common stock for gross proceeds of $25.5 million not including any proceeds from the exercise of the warrants (or approximately $23.8 million net of transaction fees and expenses). As part of the financing, we agreed to a covenant that the net proceeds from the transaction be used solely to fund the development of TPI 287 in accordance with an approved budget for fiscal years 2006 and 2007.

Despite this recent financing, our business will require substantial additional investment that we have not yet secured. We cannot be sure how much we will need to spend in order to develop, market and manufacture new products and technologies in the future. We expect to continue to spend substantial amounts on research and development, including amounts spent on conducting clinical trials for our product candidates. Further, we will not have sufficient resources to develop fully any new products or technologies unless we are able to raise substantial additional financing on acceptable terms. We could also be required to seek strategic partners at an earlier stage than might be preferable and on less favorable terms than might be otherwise available. To the extent we raise additional capital by issuing equity securities; our stockholders may experience substantial dilution. In addition, any new securities issued might have rights, preferences or privileges senior to those of the securities held by stockholders. If we raise additional funds through the issuance of debt, we might become subject to restrictive covenants or we may subject our assets to security interests. To the extent that we raise additional funds through collaboration and licensing arrangements, we may be required to relinquish some rights to our technologies or product candidates, or grant licenses on terms that are not favorable to us. Our failure to raise capital when needed would adversely affect our business, financial condition and results of operations, and could force us to reduce or discontinue our operations at some time in the future.

Our product candidates and technologies are in an early state of development and there is a high risk that they may never be commercialized because of the costs of continuing development or for other reasons.

We do not currently have any products that have received regulatory approval for commercial sale, and we face the risk that none of our product candidates will ever receive regulatory approval. All of our product candidates are in early stages of development. Our existing product candidates will require extensive additional clinical evaluation, regulatory review, marketing efforts and significant investment before they result in any revenues. We currently do not have the funds to bring any of our product candidates through to commercial approval. Therefore, advancing the development of our product candidates will require substantial additional investment. Continued development of these programs is therefore dependent upon raising additional capital. We cannot be certain that we will be able to obtain capital on acceptable terms, or at all. We do not expect any of our prospective products or technologies to be commercially available for at least several years and our efforts may not lead to commercially successful products for a number a reasons including the inability to be proven safe and effective in clinical trials, the lack of regulatory approvals or obtaining regulatory approvals that are narrower than we seek, inadequate financial resources to complete the development and commercialization of our product candidates or the lack of acceptance in the marketplace. We continuously reassess all of our research and development efforts, including those for the therapeutic products described in the “Business” section of our most recent annual report on Form 10-K. As new information about each technology becomes available, it may change perceptions of previously accepted data, which could require additional periods of time to review and interpret these data. As a result, we may find deficiencies in the design or application stages while developing our clinical trial studies, or in the subsequent implementation stages of such studies, which could cause us or the FDA to delay, suspend or terminate our trials at any time. Potential problems we may encounter in the implementation stages of our studies include the chance that we may not be able to

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conduct clinical trials at preferred sites, obtain sufficient test subjects or begin or successfully complete clinical trials in a timely fashion, if at all. Furthermore, the FDA may suspend clinical trials at any time if it believes the subjects participating in trials are being exposed to unacceptable health risks or if it finds deficiencies in the clinical trial process or conduct of the investigation. At any time, we may expand, delay, terminate or dispose of all or any portion of our research and development programs and therapeutic products or we may develop or acquire rights to new product candidates.

Our potential products and technologies must undergo rigorous clinical testing and regulatory approvals and compliance, which could substantially delay or prevent us from marketing any products.

The clinical development of our product candidates has many risks of failure. Drugs must be proven safe and effective before they can be approved for human use. The advancement of drug candidates into human clinical trials is dependent on the positive outcome of pending preclinical studies, decisions by the FDA, institutional review boards, and other regulatory factors. Patient recruitment for clinical trials can be difficult, and clinical trials may be delayed or prolonged due to inability to recruit a sufficient number of patients. We may encounter significant delays or excessive costs in our efforts to secure regulatory approvals. Our product candidates rely on new and unproven technologies, and none of our proposed products or technologies has yet completed clinical tests designed to measure their safety or effectiveness in humans. The data obtained from preclinical and clinical activities are susceptible to varying interpretations which could delay, limit or prevent regulatory approvals. Failure to comply with applicable FDA or other regulatory requirements may result in criminal prosecution, civil penalties and other actions that would seriously impair our ability to conduct our business. Even if regulatory approval is granted for a product, this approval will be limited to those disease states and conditions for which the product is useful, as demonstrated through clinical trials. In addition, regulatory agencies may not approve the labeling claims that are necessary or desirable for the successful commercialization of our product candidates. Even if we receive regulatory approvals, our product candidates may later exhibit adverse effects that limit or prevent their widespread use or that force us to withdraw those product candidates from the market. In addition, a marketed product continues to be subject to strict regulation after approval. Any unforeseen problems with an approved product or any violation of regulations could result in restrictions on the product, including its withdrawal from the market.

Any delay in, or failure to receive or maintain regulatory approval for, any of our products could prevent us from ever generating meaningful revenues or achieving profitability. Given the uncertainty of drug development, it is impossible to say how long the clinical development of any of these compounds will take. We cannot be sure that our clinical testing for these programs will progress at the times estimated in this document. We also cannot be sure of the cost of the effort necessary to complete these programs or when, if ever, we will receive material revenues from these programs. Successfully completing these programs and obtaining an approved product for sale in the U.S. and offshore will be dependent upon our raising additional capital. We cannot be certain that we will be able to obtain capital on acceptable terms or at all.

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

The manufacture of our drug candidates is a complex process. Manufacturing these drugs for use in clinical trials, according to FDA guidelines, presents a number of significant risks and challenges. The manufacture of TPI 287, in particular, is a very complex and difficult process. If we are unable to manufacture adequate supplies of any of our compounds for our clinical trials, our timelines for development could be delayed significantly. If we are able to gain regulatory approval of our products after successful clinical trials and then commercialize and sell those products, we may be unable to manufacture enough products to maintain our business, which could have a negative impact on our financial condition. We have no experience in manufacturing any of our proposed product candidates on a commercial basis.

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We also have no laboratories or manufacturing facilities for such commercial manufacturing activity. If we are unable to manufacture our products in a cost-effective manner, we are not likely to become profitable. We have not received a license from the FDA for any necessary manufacturing facilities, and cannot apply for one until we submit a new potential product for commercial approval. Even if we do receive a manufacturing license, we may fail to maintain adequate compliance with the FDA’s regulations concerning current good manufacturing practices, in which case the license, and our authorization to manufacture the product, would be revoked. Unless we build our own manufacturing facilities, we will have to rely on third parties to manufacture our products. Although we may be able find third-party manufacturers with experience and the proper licensing requirements from the FDA, we may not be able to negotiate favorable terms regarding costs or a long-term commitment to manufacture our products. Our dependence on third parties may reduce future profit margins and delay or limit our ability to develop and commercialize our products on a timely and competitive basis.

We rely on third-parties to perform certain services for us and any interruption or termination of these arrangements may adversely affect our business.

We rely on third-party contractors to provide certain services related to our research and development activities. Contractors handle our U.S. and international regulatory affairs, provide certain manufacturing, technical and analytical services and manage certain aspects of our clinical development. Our outsourcing of certain functions to independent, third parties poses the following risks:

·  our contracts with independent contractors may expire or be terminated, and we may not be able to replace them;

·  a contractor may not commit sufficient resources to our projects;

·  a contractor may file for bankruptcy protection or otherwise lack sufficient resources to perform all of its obligations under our agreement;

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

·  disputes with our contractors may arise, leading to delays in or termination of the development or commercialization of our products or resulting in significant litigation or arbitration proceedings.

The failure of our third-party contractors to provide services to us in a timely manner could materially harm our business and financial condition. In addition, our use of outside parties could potentially lead to difficulties in coordinating activities. Outside parties may have staffing difficulties, may undergo changes in priorities or may have inadequate financial or other resources, adversely affecting their willingness or ability to provide certain services to us. We may experience unexpected cost increases that are beyond our control. Problems with the timeliness or quality of the work of a third party contractor may lead us to seek to terminate the relationship and use an alternative service provider. Making this change might be costly and may delay our clinical trials. Further, contractual restrictions may make such a change difficult or impossible. Additionally, it may be impossible to find a replacement organization that can assist us in an acceptable manner and at an acceptable cost.

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We may be required to rely on strategic partners for the development, marketing and manufacturing of future products and technologies that may delay or impair our ability to generate significant revenue and may otherwise adversely affect our profitability.

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

·  it may be difficult to successfully negotiate arrangements with potential strategic partners on acceptable terms;

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

·  a partner involved in the development of new products or technologies may not commit enough capital or other resources to develop or commercialize these products or technologies successfully;

·  a strategic partner may not commit enough resources to the marketing and distribution of our products;

·  we may have disputes with strategic partners that could delay or terminate the development or commercialization of our products or result in significant litigation or arbitration proceedings;

·  contracts with our strategic partners may not provide significant protection or may be difficult to enforce if a strategic partner fails to perform;

·  our strategic partners may decide not to further develop or commercialize our products;

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

·  our strategic partners could turn their focus away from oncology;

·  our strategic partners who may manufacture future products could fail to operate their facilities in accordance with federal good manufacturing practices regulations; and

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

We may not be successful in obtaining required foreign regulatory approvals, which would prevent us from marketing our products internationally.

Outside the U.S., our ability to market a product is contingent upon receiving a marketing authorization from the appropriate regulatory authority. This foreign regulatory approval process includes many of the same steps and uncertainties associated with FDA approval described above. We cannot be certain that we will obtain any regulatory approvals for our product candidates and technologies in other countries. In order to market our products outside of the U.S., we also must comply with numerous and varying foreign regulatory requirements implemented by foreign regulatory authorities governing the conduct of clinical trials, product licensing, pricing and reimbursement. The approval procedure varies among countries and can involve additional testing. The time required to obtain approval may differ from that required to obtain FDA approval and approval by the FDA does not ensure approval by the health authorities of any other country. The process of obtaining foreign regulatory approvals can be lengthy and require the expenditure of substantial capital and other resources. We may not be successful in obtaining the necessary approvals. Any delay or failure to demonstrate the safety and effectiveness of a pharmaceutical product candidate under development and obtain foreign regulatory approval could have a material adverse effect on our business.

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We may be unable to attract and retain the qualified employees we need to be successful.

We are highly dependent on members of our staff that lead or play critical roles in our research and development efforts. We require highly qualified and trained scientists with the necessary skills to develop our product candidates. Recruiting and retaining qualified technical and managerial personnel will also be critical to our success. We face intense competition for these professionals from other companies in our industry and the turnover rate for these professionals can be high. The loss of any of these persons, or our inability to recruit additional personnel necessary to our business, could substantially impair our research and development efforts and impede our ability to develop and commercialize any of our products. In addition, we rely on other consultants and advisors to assist us in formulating our research and development strategy. Some have consulting or other advisory arrangements with other entities that may conflict or compete with their obligations to us.

Our use of hazardous materials exposes us to the risk of material environmental liabilities, and we may incur substantial additional costs to comply with environmental laws in connection with the operation of our research and manufacturing facilities.

We may use radioactive materials and other hazardous or biohazardous substances in our research and development. As a result, we are potentially subject to material liabilities related to personal injuries or property damages that may be caused by the spread of radioactive contamination or by other hazardous substance releases or exposures at, or from, our facilities. Decontamination costs associated with radioactivity releases, other clean-up costs, and related damages or liabilities could be significant and could harm our business. The cost of this liability could exceed our resources.

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

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

Our business may expose us in the future to product liability risks, which are inherent in the testing, manufacture, marketing and sale of pharmaceutical products. Product liability claims might be brought against us by clinical trial patients, consumers or health care providers or by pharmaceutical companies or others selling our products. If we complete clinical testing for our product candidates and receive regulatory approval to market our products, we will include warnings on our products that identify the known potential adverse effects and the patients who should not receive our product. 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 successfully defend ourselves against such claims, we may incur substantial liabilities or be required to limit commercialization of our future products. We cannot predict all of the possible harms or side effects that may result and, as a result, the amount of insurance coverage we currently hold, or that we may obtain, may not be adequate to protect us from any liabilities. We may require increased liability coverage as our product candidates advance in clinical trials and later develop and commercialize these products. Further, insurance coverage is increasingly expensive, and we do not know whether we will be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to liability. A successful product liability claim brought against us in excess of our insurance

32

coverage or a product recall could adversely affect our business, results of operations and financial condition.

Risks Related to Our Industry

Competition from third parties may hinder our success.

If we develop and commercialize our product candidates in the future, we expect competition from fully integrated pharmaceutical companies and more established biotechnology companies as well as government, universities and public and private research institutions. These companies and institutions conduct research, seek patent protection and establish collaborative arrangements for product development and marketing. Most of these companies and institutions have significantly greater financial resources and expertise than we do in the following:

·  research and development;

·  preclinical studies and clinical trials;

·  obtaining regulatory approvals;

·  manufacturing; and

·  marketing and distribution.

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

Legislative and regulatory proposals to reduce the cost of health care could adversely affect our business.

There have been a number of federal and state proposals in the U.S. to implement government controls on pricing and other efforts to reduce the cost of health care, including proposals to reform health care or reduce government insurance programs. Our business is affected by these efforts and these efforts could adversely affect prices of our products. In addition, government pricing controls exist in varying forms in other countries. The emphasis on managed care in the U.S. has also increased and will likely continue to increase the pressure to reduce the prices of pharmaceutical products. We cannot predict whether any of these proposals will be adopted or the effect these proposals or managed care efforts may have on our business. In addition, the current discussion of drug reciprocation into the U.S. could also affect our future business operations. Some proposals would permit the reimportation of approved drugs that were originally manufactured in the U.S. from other countries where the drugs were sold at a lower price. These and other initiatives could decrease the price we or any potential marketing partners receive for our products, adversely affecting our profitability. The pendency or approval of such proposals could result in a decrease in our stock price or limit our ability to raise capital, enter into strategic partnerships or obtain licenses.

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We may be unable to effectively price our products or obtain adequate reimbursement for sales of our products, which would prevent our products from becoming profitable.

Our product candidates, if developed and commercialized, may not be considered cost-effective, and coverage and adequate payments may not be available or may not be sufficient to allow us to sell these products on a competitive basis. In both the United States and elsewhere, sales of medical products and treatments are dependent, in part, on the availability of reimbursement from health maintenance organizations, other private insurance plans, governmental programs such as Medicare, and other third-party payors. Third-party payers are increasingly challenging the prices charged for pharmaceutical products and services. Government and other third-party payors increasingly are attempting to contain health care costs by limiting both coverage and the level of reimbursement for new drugs and by refusing, in some cases, to provide coverage for uses of approved products for diseases or conditions for which the FDA has not granted labeling approval. Significant uncertainty exists as to whether and how much third-party payors will reimburse patients for their use of newly-approved drugs, which in turn will put pressure on the pricing of drugs. Third-party insurance coverage may not be available to patients for our products. If government and other third-party payors do not provide adequate coverage and reimbursement levels for our products, their market acceptance may be reduced or we may not be able to commercialize our products.

Risks Related to Our Intellectual Property

Our success is dependent on obtaining and defending patents and proprietary technology.

Our success in commercializing, producing and marketing products and technologies in the future depends, in part, on our ability to obtain and maintain adequate protection of the intellectual property related to our technologies and products, both in the U.S. and other countries, and to operate without infringing the proprietary rights of third parties. We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary technologies are covered by valid and enforceable patents. The patent positions of biotechnology companies, including our patent positions, are generally uncertain and involve complex legal and factual questions.

We cannot predict the breadth of claims that will be allowed and issued to us for patents related to biotechnology or pharmaceutical applications. Before a patent is issued, its coverage can be significantly narrowed, either in the U.S. or abroad. We also do not know whether any of our pending or future patent applications will result in the issuance of patents. To the extent patents have been issued or will be issued, some of these patents are subject to further proceedings that may limit their scope and once patents have been issued, we cannot predict how the claims will be construed or enforced. It is not possible to determine which patents may provide significant proprietary protection or competitive advantage, or which patents may be circumvented or invalidated. Furthermore, patents already issued to us, or patents that may be issued on our pending applications, may become subject to dispute, including interference proceedings in the U.S. to determine priority of invention. If our currently issued patents are invalidated or if the claims of those patents are narrowed, our ability to prevent competitors from marketing products that are currently protected by those patents could be reduced or eliminated. We could then face increased competition resulting in reduced market share, prices and profit.

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

Our patents may not afford us protection against competitors, especially since there is a lengthy time between when a patent application is filed and when it is issued. We may also incur substantial costs in asserting claims against, and defending claims asserted against us by third parties to prevent the

34

infringement of our patents and proprietary rights by others. Participation in such infringement proceedings may adversely affect our business and financial condition, even if the eventual outcome is favorable.

Litigation or third party claims of intellectual property infringement could require us to spend substantial time and money and adversely affect our ability to develop and commercialize our products.

Our commercial success also depends in part on our ability to avoid infringing patents and proprietary rights of third parties and not breaching any licenses that we have entered into with regard to any future products. There are many pharmaceutical and chemical patents and applications being filed, published, and issued frequently throughout the world. Some of these patents and applications contain disclosures and claims that are similar to technologies and products that we are using and developing. Some of these patents and disclosures contain claims and disclosures that are difficult to interpret. It is possible that a third party may own or control issued patents, or patent applications or in the future may file, patent applications covering technologies or products we are developing.

If our technology, products or activities are deemed to infringe the other companies’ rights, we could be subject to damages or be prevented from using the technology or selling the product that is infringing other companies’ rights, or we could be required to obtain licenses to use that technology or sell the product. If patents covering technologies required by our operations are issued to others, we may have to rely on licenses from third parties, which may not be available on commercially reasonable terms, if at all. Third parties may accuse us of employing their proprietary technology without authorization. In addition, third parties may obtain patents that relate to our technologies and claim that our use of such technologies infringes their patents, even if we have received patent protection for our technology. Such claims could require us to incur substantial costs and could have a material adverse effect on us, regardless of the merit of the claims, including the following:

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

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

·  being prohibited from selling or licensing our products or product candidates unless and until we obtain a license from the patent holder, who may refuse to grant us a license or who may only agree to do so on unfavorable terms. Even if we are granted a license, we may have to pay substantial royalties or grant cross-licenses to our patents;

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

·  incurring substantial cost in defending ourselves and indemnifying our strategic partners in patent infringement or proprietary rights violation actions brought against them relating to their development and commercialization of our products; and

·  incurring substantial cost in indemnifying the investors in the financing that closed on April 5, 2006 in the event that any intellectual property infringement is deemed to be a breach of the purchase agreement for the financing.

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

Our oncology programs may require the use of multiple products or technologies proprietary to other parties. Third party suppliers may not be able to furnish us with a supply of these products sufficient to satisfy our requirements. We may not be able to obtain additional licenses we may need in the future on terms acceptable to us. Our inability to obtain any one or more of these licenses, on commercially reasonable terms, if at all, or to circumvent the need for any such license, could cause significant delays and cost increases and materially affect our ability to develop and commercialize our product candidates. In connection with our efforts to obtain rights to these proprietary technologies, we may find it necessary to convey rights to our technology to others. Some of our products may require the use of multiple proprietary technologies. Consequently, we may be required to make cumulative royalty payments to several third parties. These cumulative royalties could become commercially prohibitive. We may not be able to successfully negotiate the amounts of these royalties on terms acceptable to us.

We may rely in part on third party licenses for access to intellectual property relating to our oncology programs. Such licenses may obligate us to exercise diligence in pursuing the development of product candidates, to make specified milestone payments and/or to pay royalties. Our inability or failure to meet any such diligence requirements or make any required payments would likely result in a reversion to the licensor of the rights granted, which could materially and adversely affect our ability to develop and market products based on our licensed technologies.

Risks Related to Our Stock

The investors in our recently consummated financing have acquired shares of common stock and warrants representing substantially more than a majority of shares of our outstanding common stock and have the ability to exert control over our activities.

The investors in the recently consummated financing have acquired shares of our common stock and warrants to acquire such shares representing up to approximately 88% of our common stock, assuming the exercise in full of the warrants issued in the financing. As a result, those investors hold a sufficient portion of our outstanding shares so as to permit them, if they chose to act in concert, to approve all actions requiring stockholder approval, including the election of directors and the approval of mergers or other business combination transactions, without obtaining the approval of any other stockholder.

Future sales and issuances of our common stock or rights to purchase common stock, including pursuant to our equity incentive plans, could result in additional dilution of the percentage ownership of our stockholders and could cause our stock price to fall.

We expect that significant additional capital will be required in the future to continue our research and development efforts. To the extent we raise additional capital by issuing equity securities, our stockholders may experience substantial dilution. We may sell common stock in one or more transactions at prices and in a manner we determine from time to time. If we sell common stock in more than one transaction, stockholders who purchase stock may be materially diluted by subsequent sales. Such sales may also result in material dilution to our existing stockholders. In addition, our Board of Directors and stockholders recently adopted a new equity incentive plan that will provide for an initial reservation of 6,577,106 shares of common stock, for which 5,787,468 options are outstanding and 789,588 shares remain reserved for future grants as of October 18, 2006. The shares available for issuance under this equity incentive plan may be increased by up to 1,600,000 shares of common stock based upon the number of shares of common stock we issue during the three year period after April 5, 2006. Our stockholders also recently approved an amendment to our bylaws and our existing stock option plans to permit the repricing of approximately 630,038 of our currently outstanding stock options, which was effected on April 4, 2006 and the exercise price of each such repriced option was reduced to $4.02 per share.

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

Sales of a substantial number of shares of our common 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 ability to raise capital through the sale of additional equity securities. We are unable to predict the effect that sales may have on the then prevailing market price of our common stock. Pursuant to a Registration Rights Agreement entered into between us and the purchasers of our common stock and warrants in the financing recently closed on April 6, 2006, such purchasers are entitled to certain registration rights with respect to the shares of common stock that were issued to them at closing and that may be issued upon exercise of the warrants issued to them at closing, pursuant to which we must, among other things, file with the Securities and Exchange Commission a registration statement for the resale of such shares of common stock and the shares of common stock underlying such warrants.

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

Our common stock is listed on the Nasdaq Capital Market. In order to maintain that listing, we must satisfy minimum financial and other requirements. On February 25, 2005, we received notice from the Nasdaq Stock Market, Inc. that our common stock had not met the $1 per share minimum bid price requirement for 30 consecutive business days and that, if we were unable to demonstrate compliance with this requirement during the applicable grace periods, our common stock would be delisted after that time. On February 6, 2006, we effectuated a one for ten reverse stock split to regain compliance with this listing requirement. Since the reverse stock spilt was effectuated, the closing bid price of our common stock has remained above $1.00 in compliance with the minimum bid price requirement.

Notwithstanding that the trading price of our common stock currently exceeds the minimum bid price required to maintain compliance with the Nasdaq Capital Market listing requirements, it is possible that the minimum bid price of our common stock could fall below the required level or that we would otherwise fail to satisfy another Nasdaq requirement for continued listing of our common stock. For example, we could fail to maintain compliance with the Nasdaq Capital Market listing requirements if we did not maintain minimum stockholder equity of at least $2.5 million as a result of continuing losses.

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

Our stock compensation expense will negatively impact our earnings, and as we report the fair value of employee stock options as an expense in conjunction with a new accounting standard, our reported financial performance will be adversely affected, which may cause our stock price to decline.

In December 2004, the Financial Accounting Standards Board issued SFAS 123(R), “Accounting for Stock-Based Compensation”. SFAS 123(R) establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. This statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS 123(R) requires that the fair value of such equity instruments be recognized as an expense in the historical financial statements as services are performed. Prior to SFAS 123(R), only certain pro forma disclosures of fair value were required. As a result of the adoption of SFAS 123(R), we have recognized stock-based compensation expense of $593,000 or $.03 basic and diluted per share from continuing operations for the three-months ended September 27, 2006. In addition, we have recognized

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stock-based compensation expense of $2.4 million or $.20 basic and diluted per share from continuing operations for the nine-months ended September 27, 2006. Included in the stock-based compensation expense for the nine-months ended September 27, 2006 is a one-time non-cash fixed charge in the amount of $381,000 as a result of the amendment of certain vested options under the our existing equity incentive plans. As of September 27, 2006, there was $9.1 million of total unrecognized compensation expense related to unvested share-based compensation arrangements granted under our stock option plans. This amount will be recognized over a weighted-average period of approximately 4.5 years.

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

Our certificate of incorporation and bylaws provide that the Board of Directors will be divided into three classes, each consisting, as nearly as possible, of one-third of the total number of directors, with each class having a three-year term. Stockholders may take action only at a stockholders’ meeting and not by written consent. Certain provisions of our certificate of incorporation and bylaws, including the provisions providing for a classified Board of Directors, may not be amended without the vote of at least 80% of the voting power of all of our capital stock entitled to vote generally in the election of directors, voting together as a single class. Our bylaws provide that stockholders wishing to nominate a director at an annual meeting or at a special meeting called for the purpose of electing directors or to bring business before any meeting of stockholders must comply with strict advance written notice provisions. Our bylaws also provide that special meetings of stockholders may be called only by the chairman of our Board of Directors, or certain of our officers, or by resolution of our directors.

These provisions of our certificate of incorporation and our bylaws could discourage potential acquisition proposals and could delay or prevent a change in control. These provisions are intended to enhance the likelihood of continuity and stability in the composition of our Board of Directors and in the policies formulated by our Board of Directors. We also intended these provisions to discourage certain types of transactions that may involve an actual or threatened change of control. We designed these provisions to reduce our vulnerability to unsolicited acquisition proposals and to discourage certain tactics that may be used in proxy contests. These provisions, however, could also have the effect of discouraging others from making tender offers for our shares. As a consequence, they also may inhibit fluctuations in the market price of our shares that could result from actual or rumored takeover attempts. Such provisions also may have the effect of preventing changes in our management. We are permitted to issue shares of our preferred stock without stockholder approval upon such terms as our Board of Directors determines. Therefore, the rights of the holders of our common stock are subject to, and may be adversely affected by, the rights of the holders of our preferred stock that may be issued in the future. In addition, the issuance of preferred stock could have a dilutive effect on the holdings of our current stockholders.

In November 1996, we adopted a stockholder rights plan and distributed a dividend for each share of common stock. This dividend took the form of a right, which entitles the holders to purchase one one-hundredth of a share of a new series of junior participating preferred stock, Series B. The stockholder rights plan was amended and restated in September 2001, and we intend to replace this plan with a similar rights plan in 2006. In certain events after the rights become exercisable they will entitle each holder, other than the acquirer, to purchase, at the rights’ then current exercise price, a number of shares of common stock having market value of twice the right’s exercise price or a number of the acquiring company’s common shares having a market value at the time of twice the rights’ exercise price. The adoption of the rights plan makes it more difficult for a third party to acquire control of us without the approval of our Board of Directors. We are also subject to provisions of Delaware law that prohibit us from engaging in any business combination with any “interested stockholder,” meaning generally that a stockholder who beneficially owns more than 15% of our stock cannot acquire us for a period of three years from the date this person became an interested stockholder, unless various conditions are met, such as approval of the transaction by our Board of Directors.

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Because the investors in our financing that closed on April 5, 2006 own a substantial percentage of our outstanding common stock, we amended the stockholder rights plan in connection with the closing of such financing to provide that such investors and their respective affiliates will be exempt from the stockholder rights plan, unless an investor and its affiliates acquire, after April 4, 2006, more than 1% of our then issued and outstanding common stock, not including the shares of common stock issued to the investors in the financing or shares of common stock issued upon exercise of the warrants issued to the investors in the financing.

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

Not applicable

Item 3.        Defaults upon Senior Securities

Not applicable.

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

Not applicable

Item 5.        Other Information

Not applicable.

Item 6.        Exhibits

Exhibit Number	Description of Exhibit
31.1	Certification of Chief Executive Officer (pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended)*
31.2	Certification of Chief Financial Officer (pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended)*
32.1#	Certification of Chief Executive Officer (pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. Section 1350))*
32.2#	Certification of Chief Financial Officer (pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. Section 1350))*

*       Filed herewith

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

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Signatures

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

	TAPESTRY PHARMACEUTICALS, INC.
January 30, 2007	By:		/s/ LEONARD P. SHAYKIN
	Leonard P. Shaykin
	Chairman of the Board of Directors,
	Chief Executive Officer
January 30, 2007	By:	/s/ GORDON LINK
	Gordon Link
	Senior Vice President,
	Chief Financial Officer
	(Principal Financial Officer)
January 30, 2007	By:	/s/ MATTHEW J. MAJOROS
	Matthew J. Majoros
	Controller (Principal Accounting Officer)

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Index of Exhibits

Exhibit Number	Description of Exhibit
31.1	Certification of Chief Executive Officer (pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended)*
31.2	Certification of Chief Financial Officer (pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended)*
32.1#	Certification of Chief Executive Officer (pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. Section 1350))*
32.2#	Certification of Chief Financial Officer (pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. Section 1350))*

*       Filed herewith

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

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EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, Leonard P. Shaykin, certify that:

1.I have reviewed this quarterly report on Form 10-Q/A of Tapestry Pharmaceuticals, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act rules 13a-15(f) and 15d-15(f))for the registrant and have:

a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: January 30, 2007

/s/ LEONARD P. SHAYKIN

Leonard P. Shaykin

Chairman of the Board of Directors

Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION

I, Gordon Link, certify that:

1.I have reviewed this quarterly report on Form 10-Q/A of Tapestry Pharmaceuticals, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act rule 13a-15(f) and 15d-15(f))for the registrant and have:

a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a.All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: January 30, 2007

/s/ GORDON LINK

Gordon Link

Senior Vice President and Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

Pursuant to the requirements set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350), the undersigned, Leonard P. Shaykin, Chairman of the Board of Directors and Chief Executive Officer of Tapestry Pharmaceuticals, Inc. (the “Company”) does hereby certify, to his knowledge, that:

(a)the Quarterly Report on Form 10-Q/A for the quarterly period ended September 27, 2006 of the Company to which this certification is attached (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act, and

(b)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: January 30, 2007

/s/ LEONARD P. SHAYKIN

Leonard P. Shaykin

Chairman of the Board of Directors and

Chief Executive Officer

A signed original of this written statement required by Section 906 has been provided to Tapestry Pharmaceuticals, Inc. and will be retained by Tapestry Pharmaceuticals, Inc. and furnished to the Securities and Exchange Commission (SEC) or its staff upon request. This certification “accompanies” the Form 10-Q/A to which it relates, is not deemed filed with the SEC and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-Q/A), irrespective of any general incorporation language contained in such filing.

EX-32.2

EXHIBIT 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

Pursuant to the requirements set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350), the undersigned, Gordon Link, Senior Vice President and Chief Financial Officer of Tapestry Pharmaceuticals, Inc. (the “Company”) does hereby certify, to his knowledge, that:

(a)the Quarterly Report on Form 10-Q/A for the quarterly period ended September 27, 2006 of the Company to which this certification is attached (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act, and

(b)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: January 30, 2007

/s/ GORDON LINK

Gordon Link

Senior Vice President and Chief Financial Officer

A signed original of this written statement required by Section 906 has been provided to Tapestry Pharmaceuticals, Inc. and will be retained by Tapestry Pharmaceuticals, Inc. and furnished to the Securities and Exchange Commission (SEC) or its staff upon request. This certification “accompanies” the Form 10-Q/A to which it relates, is not deemed filed with the SEC and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-Q/A), irrespective of any general incorporation language contained in such filing.