**UNITED STATES**

** SECURITIES ANDEXCHANGE COMMISSION**

**Washington****, D.C. 20549**

**FORM 10-K**

[**X**]  AnnualReport Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the fiscal year ended December 31, 2006.

or

[  ]  TransitionReport Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from _____________ to _______________.

**Commission file number 0-23666**

**Tripos, Inc.**

(Exact name of registrant as specified in its charter)

| **Utah**                                                            | ** **                                 | **43-1454986**                       |
|---------------------------------------------------------------------|--------------------------------------------|--------------------------------------|
| (State or other jurisdiction of incorporation or  organization)     | ** **                                 | (I.R.S. Employer Identification No.) |
|                                                                     |                                            |                                      |
| **1699 S. Hanley Rd, St. Louis, MO**                                | ** **                                 | **63144**                            |
| (Address of principal executive offices)                            |                                            | Zip Code                             |
| Registrant's telephone number, including area code:  (314) 647-1099 |
|                                                                     |                                            |
| Securities registered pursuant to Section 12(b) of  the Act:        |
| Title of each class                                                 | Name of each exchange on which registered: |
|  Common stock, $.01 Par Value                                  | NASDAQ Stock Market                        |
|                                                                     |                                            |
| Securities registered pursuant to Section 12(g) of  the Act:        |
| None                                                                |
| (Title of class)                                                    |
|                                                                     |                                            |                                      |  |  |

Indicateby check mark if the registrant is a well-known seasoned issued, as defined inRule 405 of the Securities Act.   Yes __  No X     

Indicateby check mark if the registrant is not required to file reports pursuant toSection 13 or Section 15(d) of the Act.   Yes __  No X              

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter 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__

Indicate by check mark if disclosure ofdelinquent filers pursuant to Item 405 of Regulation S-K is not containedherein, and will not be contained, to the best of registrant's knowledge, indefinitive proxy or information statements incorporated by reference in PartIII of the Form 10-K or any amendment to this Form 10-K [**X**].

Indicate by check mark whether the registrant isa large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2of the Exchange Act. 

| Large accelerated  filer  ___ | Accelerated filer  ___ | Non-accelerated filer   _X |
|------------------------------------|-----------------------------|---------------------------------|

Indicate by check mark whether the registrant isa shell company (as defined in Rule 12b-2 of the Act).  Yes__         No  X

The aggregate market value of the voting stockheld by non-affiliates of the Registrant as of June 30, 2006****was $11,198,637(based upon the June 30, 2006 closing price for shares of the Registrant'sCommon Stock as reported by the NASDAQ Global Select Market).  Shares of CommonStock held by each officer, director and holder of 5% or more of theoutstanding Common Stock have been excluded in that such persons may be deemedto be affiliates.  This determination of affiliate status is not necessarily aconclusive determination for other purposes.

On March 30, 2007, there were 10,392,835****sharesof the Registrant's Common Stock outstanding with a par value of $0.01.

**DOCUMENTS INCORPORATED BY REFERENCE**

None.

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**PART I**

**Item1.  Business**

** **

**OVERVIEWAND SUMMARY OF RECENT ACTIVITIES**

Tripos, Inc. ("Tripos")is in the process of selling its operating businesses.  The following is asummary of our recent activities.

*      On November 20, 2006, Tripos announcedthat it had entered into an agreement to sell its discovery informaticsbusiness and, assuming closing of this transaction, dissolve and liquidate.

*      On January 2, 2007, Tripos announced that it had enteredinto an agreement to sell its discovery research business.  Since that date,Tripos has determined that the contract purchaser is unlikely to conclude thesale.  This agreement terminated by its terms on April 2, 2007.  Tripos is inthe process of marketing this business on revised terms to this and other potential purchasers.

*      On March15, 2007,Tripos' stockholders approved the sale of the assets of the discoveryinformatics business to a newly-formed subsidiary of Vector Capital Corporationand the dissolution and liquidation ofTripos.   

*      On March 20, 2007, Tripos completedthe sale of its discovery informatics business to Tripos (Cayman), L.P. forcash in the amount of $26.2 million and used $11.8 million of the proceeds torepay indebtedness to LaSalle Bank andHorizon Technology Finance.

*      Under the asset purchase agreement with thenewly formed subsidiary of Vector Capital, Tripos is prohibited from makingdistributions to common stockholdersuntil September 20,2007 and during that time must resolveall creditor claims.

*      As of the date hereof, Tripos continues tooperate its UK-based Discovery Researchbusiness, while actively seeking a purchaser.  If Tripos cannot sell thisbusiness in the near term, it is the current intention of the Board of Directors to shut this business down.

*      Under generally accepted accounting principles,Tripos is required to report the results of its discovery informaticsbusinesses as continuing operationsthrough March 15,2007, the date of stockholder approval. However, Tripos'discovery research business is reported herein as discontinued operations through December 31, 2006.  With the approval by the shareholders for thesale of DI and the Company's plan of liquidation, we changed the basis ofaccounting for periods subsequent to March 15, 2007, from the going-concernbasis to a liquidation basis.

Due to the sale of itsprincipal operating unit, the discovery informatics business, and Tripos' plans to either sell discovery research in the near future or shut this business down, Triposexpects to have minimal operations in the near future.  Rather, its principalactivities will be to complete the sale orshut-down of the discovery research business and the activities needed to completethe dissolution and liquidation of the business, pending the initialliquidating distribution expected to be made late in the third quarter of 2007or in the fourth quarter of 2007.

Discovery ResearchBusiness  

Tripos DiscoveryResearch Centre's laboratories, based in the United Kingdom, offer compounddesign and synthesis, molecular analysis, a complete suite of lead discoveryand lead optimization capabilities and newly introduced target-specificchemical libraries on which Tripos has applied for patent protection. Triposoffers off-the-shelf libraries of compounds sold for pharmaceutical screeningpurposes.  We also participate with our customers in strategic chemistryresearch projects, primarily on a fee for service basis.   In a few cases, the transferof intellectual property rights for these therapeutic collaborations mayinclude royalty or milestone payments associated with advancement of thecompounds through various stages of drug development.  In addition, Tripos'newly introduced target-specific libraries are intended to be a platform forour further collaborative development with clients.

During 2006, the discoveryresearch business generated revenues of $6.6 million and net operating lossesof $32.7 million.  These results take into account impairment charges that wererecorded in the 3rd and 4th quarters of 2006 prior to classification of the business unit as adiscontinued operation.

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Liquidation and Dissolution Activities.  

Tripos is currentlyconducting the following principal activities toward a dissolution andliquidation of the Company:

*      Seekingto restructure obligations to certain British national and regional governmentalauthorities arising out of various economic development grants;

*      Pursuingdiscussions with several potential purchasers for the discovery researchbusiness including the senior U.K. management team of DR with whom the Companyis in advanced negotiations;

*      Withthe assistance of advisors in the UK and the US, analyzing how best to shutdown the Discovery Research business and the impact of a potential shut-down onthe amount available for distribution to Tripos stockholders;

*      Concludingthe sale of Tripos' St. Louis corporate headquarters in April 2007; and

*      Assemblingthe resources necessary to efficiently manage the liquidation and dissolutionprocess.  As of the current date, the sole employee of Tripos, other thanemployees of the discovery research business and employees being transitionedto the purchaser of the discovery informatics business, is John P. McAlister. The Board of Directors will continue to supervise the dissolution andliquidation process.

**Website Access to CompanyReports**

The Company's annual reports onForm 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and allamendments to those reports are available free of charge on the Company'swebsite at www.tripos.com as soon as reasonably practicable after suchmaterial is electronically filed with or furnished to the Securities andExchange Commission.  Printed copies of this annual report on Form 10-K will bemade available, free of charge, upon written request.

**PART IA.  RISK FACTORS**

** **

In connection with the safe harbor provisions ofthe Private Securities Litigation Reform Act of 1995, set forth below arecautionary statements identifying important factors that could cause actualevents or results to differ materially from any forward-looking statements madeby us or on our behalf, whether oral or written. We wish to ensure that anyforward-looking statements are accompanied by meaningful cautionary statementsin order to maximize to the fullest extent possible the protections of the safeharbor established in the Private Securities Litigation Reform Act of 1995.Accordingly, any such statements are qualified in their entirety by referenceto, and are accompanied by, the following important factors that could causeactual events or results to differ materially from our forward-lookingstatements. 

In addition to the other information included inthis Annual Report on Form 10-K, you should consider carefully the matters described belowin evaluating the proposed dissolution and liquidation, as well as ourbusiness.  Additional risks and uncertainties thatare not presently known to us or that we do not currently believe to beimportant to you also may adversely affect our business or the dissolution andliquidation. 

***If our expectations regarding liquidatingdistributions are inaccurate, the amount we distribute to our stockholders maybe reduced.***

*** ***

Claims, liabilities and expenses from operations(such as operating costs, salaries, directors' and officers' insurance, payrolland local taxes, legal and accounting fees and miscellaneous office expenses)will continue to be incurred as we seek to sell our DR business and we willcontinue to incur costs as we effect the dissolution.  Our expectationsregarding our expense levels may be inaccurate.  Any claims, liabilities orexpenses that arise prior to the liquidation or that exceed our estimates wouldneed to be taken into account at the time of the distribution and could reducethe amount of cash available for ultimate distribution to shareholders.

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***We believe we have undergone an"ownership change" for purposes of Section 382 of the Internal Revenue Codeduring 2006, which could affect our ability to offset gains in respect of thesale of the DI business with losses recognized in respect of the sale of the DRbusiness.***

*** ***

Although it is notentirely clear, primarily as a result of high volume in the trading of ourstock during 2006,we believe we have undergone an "ownership change" within themeaning of Section 382 of the Internal Revenue Code of 1986, as amended (the"Code"), during 2006.  In any event, because we are continuing to operate at aloss for tax purposes, we do not expect that, if applicable as a generalmatter, the limitations imposed by Section 382 of the Code will materially andadversely affect our federal income tax liability in respect of our ordinaryoperating income or in respect of the sale of the DI business, and thereforenot materially and adversely affect the amount available to otherwise bedistributed to our shareholders.  To substantially reduce or eliminate anyfederal income tax liability in respect of the sale of the DI business, we mayseek to take other steps, such as the sale of the DR business to a third partyor its abandonment for federal income tax purposes.  There can be no guarantee,however, that we would be able to affect such steps or that such steps wouldultimately be effective.  If we are unable to offset gains recognized inrespect of the sale of the DI business with losses recognized in respect of thesale of the DR businesses, or with other losses, we may incur a federal incometax liability which would decrease the amount otherwise available to ourshareholders.  See "Approval of Proposal to Adopt Plan of Dissolution andDissolve and Liquidate the Corporation--Material U.S. Federal Income TaxConsequences of the Dissolution and Liquidation--Potential Effect of CodeSection 382."

***We will incur significant costs inconnection with the asset sale transaction.***

We have incurred significant costs related to the asset sale transaction.These expenses included financial advisory,legal and accounting fees and expenses, severance and other employee expenses,filing fees, printing expenses, proxy solicitation and other related charges.We may also incur additional unanticipated expenses in connection with theasset sale transaction.  These expenses will decrease the remaining cash availablefor eventual distribution to shareholders in connection with our dissolutionand liquidation or for use in connection with any future deployment in thebusiness. 

***We expect to be delisted from******The NASDAQ Global Marketimmediately following the sale of our DR business.***

Our common stock is currently listed on theNASDAQ Global Market.  Upon the sale of our DR business, or our shutting thatbusiness down if we cannot effect a sale, we will be promptly delisted from theNASDAQ Global Market because we will no longer meet the listing requirementthat we have an operating business and will instead be a "shell" corporation.

Furthermore, on January 4, 2007 NASDAQ notifiedus that the bid price for our common stock had fallen below the $1 minimumrequired for more than 30 consecutive days and that if the situation was notremedied within 180 days of the notice our common stock would be delisted.

Upon delisting, we expect that there will be noactive public trading market for our common stock, and our board may considerderegistering our securities under the Securities Exchange Act.  We also expectto close our stock transfer books upon the sale of our DR business, at whichpoint our shareholders will no longer be able to transfer their shares of ourcommon stock.

***Our board will need to make provision forthe satisfaction of all of our known and unknown liabilities, which couldsubstantially delay or limit our ability to make any distribution toshareholders.***

Upon our dissolution andliquidation, our board of directors will be required to make adequate provisionto satisfy our liabilities, including known and unknown claims against us,before authorizing any distributions to shareholders after dissolution. Theprocess of accounting for our liabilities, including those that are presentlyunknown, may involve difficult and subjective valuation decisions and estimates,which could adversely impact the board's ability to make any such distributionafter dissolution in a timely manner. Substantial time may be required for us todetermine the extent of our liabilities to known third party creditors andclaimants and for us to settle or judicially resolve any claims that arecontested. Furthermore, pursuant to the Utah Revised Business Corporation Act,we may be subject to claims being commenced against us for liabilities unknownto us for a period of five years after we satisfy certain general noticerequirements under that Act.  As a result, there can be no assurance that wewould have sufficient cash available to make any distributions to shareholdersafter our dissolution and liquidation.  If we were to have sufficient remainingcash, a substantial period may elapse after dissolution before we would be ableto make any such distribution to shareholders, and such distribution wouldlikely be made in more than one installment over an extended period of time. 

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***We are required to make prioritydistributions to holders of our Series C preferred stock before makingliquidating distributions to holders of our common stock.***

** **

Under our Articles of Incorporation, as amended,the holders of our Series C preferred stock are entitled to receive a fixed,priority distribution upon any liquidation, dissolution or winding-up of Triposor in the event of a Deemed Liquidation (as defined therein). The consummationof the sale of the DI business qualified as a Deemed Liquidation under ourArticles of Incorporation and thereby triggered our obligation to make certainpriority distributions to the holders of our Series C preferred stock beforedistributions to holders of common stock.  The amount due as of thedate of this filing for redemption of Series C preferred stock is approximately $5,500,000 plus accrueddividends of up to $1,155,000 less payments made to date.  Under variousprovisions of Utah law, we will not be able to make payments on our preferredor common stock until we have paid or provided for the payment of ourliabilities.

*** ***

***If we make one or more distributionsafter dissolution, our shareholders could be liable to the extent ofdistributions received if reserves are insufficient to satisfy our contingentliabilities.***

In the event of our dissolution and liquidation,if we fail to create an adequate contingency reserve for payment of ourexpenses and liabilities, each shareholder receiving a distribution afterdissolution could be held liable for the payment to creditors of suchshareholder's *pro rata* portion of any shortfall, limited to the amountspreviously received by the shareholder in distributions from Tripos. 

If a court holds at any time that we have failedto make adequate provision for our expenses and liabilities or if the amountultimately required to be paid in respect of such liabilities exceeds theamount available from the contingency reserve, our creditors could seek aninjunction against the making of distributions after dissolution on the groundsthat the amounts to be distributed are needed to provide for the payment of ourexpenses and liabilities. The costs of defending any such action could delay orsubstantially diminish the amount of any cash distributions to shareholdersafter dissolution. 

 

***We will continue to incur the expenses ofcomplying with public company reporting requirements.***

*** ***

We have an obligation to continue to comply withthe applicable reporting requirements of the Exchange Act even thoughcompliance with such reporting requirements is economically burdensome. Inorder to curtail expenses, we may, after filing our articles of dissolution,seek relief from the Securities and Exchange Commission from the reportingrequirements under the Exchange Act.  We anticipate that, ifsuch relief were granted, we would continue to file current reports onForm 8-K to disclose material events relating to our dissolution andliquidation along with any other reports that the Securities and ExchangeCommission might require.  However, the Securitiesand Exchange Commission may not grant any such relief.

***If we fail to retain the services ofcertain key personnel, the plan of liquidation and dissolution may not succeed.***

*** ***

The success of the plan of dissolution dependsin large part upon our ability to retain the services of certain of our currentofficers. We expect John P. McAlister to remain as an employee to assist in the dissolution and liquidation afterthe closing of the asset sale transaction at compensation levels yet to bedetermined.  Failure to retain Dr. McAlister could harm the implementation of the plan ofdissolution.  If we fail to retainthe services of Dr. McAlister, we will need to hireothers to oversee our dissolution and liquidation, which could involveadditional compensation expenses, if such other personnel are available at all.

***Our stock transfer books will close onthe date we sell or shutdown our Discovery Research business, after which itwill not be possible for shareholders to publicly trade our stock.***

*** ***

We intend to close our stock transfer books anddiscontinue recording transfers of our common stock at the close of business onthe date we sell or shutdown our Discovery Research business, which we refer toas the "final record date."  Thereafter, certificatesrepresenting our common stock shall not be assignable or transferable on ourbooks except by will, intestate succession or operation of law.  The proportionate interests of all of our shareholders willbe fixed on the basis of their respective stock holdings at the close ofbusiness on the final record date, and, after the final record date, anydistributions made by us will be made solely to the shareholders of record atthe close of business on the final record date, except as may be necessary toreflect subsequent transfers recorded on our books as a result of anyassignments by will, intestate succession or operation of law. 

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**ITEM 1B. UNRESOLVEDSTAFF COMMENTS**

** **

     None.

** **

**ITEM2.  PROPERTIES**

Our principaladministrative, sales, marketing, and software product development facility islocated in St. Louis, Missouri.  We own this facility, which was previously financedby a mortgage note that has subsequently been paid off out of the proceeds ofthe sale of the DI business.  As previously disclosed on April 16, 2007, 1699-1701South Hanley Road, LLC, a Missouri limited liability company, completed thepurchase of this facility.  The sale of the property closed on April 12, 2007.  Atclosing, we entered into a 7-month lease for a portion of the building and willmake a lump sum deposit of the full rental amount of $418,000.  We presentlylease a portion of the facility to a company controlled by Vector Capital. Upon the consummation of the sale, we intend to maintain this relationship as asublease of our leased property.

We also own laboratoryfacilities (31,000 square feet) in which chemical product development anddiscovery research service contracts are executed located in Bude, Cornwall,England.  We are presently in discussions with the South West England RegionalDevelopment Agency for the purchase of this building and the leaseback of aportion of the facility.  Our European subsidiaries lease sales and serviceoffices in the United Kingdom, France, and Germany.  The office leases for theU.K. and French locations were assumed by the new Vector entity while theGerman lease is expected to be subdivided with the new Vector entity assumingapproximately one half of the space.

** **

**ITEM 3.  LEGALPROCEEDINGS**

A securities class action litigation brought on orabout July 24, 2003 against the Company and two of its executive officers, wassettled through an agreement to pay $3.15 million, which was paid by ourinsurers.  The settlement was subject to court approval after notice and anopportunity to object was provided to the putative shareholder class.  OnAugust 4, 2006 the Court entered an order approving the settlement anddismissing with prejudice all claims against the defendants.  

A shareholder derivative litigation brought onor about February 10, 2006, naming certain of the Company's officers anddirectors as defendants and the Company as a nominal defendant, was settledthrough an agreement to pay $200,000 to plaintiffs' counsel, which was paid byour insurers.  On November 17, 2006, the Court entered an order approving thesettlement.  

**ITEM4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

No matters weresubmitted to a vote of Tripos' shareholders during the fourth quarter of itsfiscal year ended December 31, 2006.

** **

**PART II**

** **

**ITEM5.  MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDERMATTERS**

Tripos' common stock trades onThe NASDAQ Global Select Market System under the symbol "TRPS".  

On January 4, 2007, we receiveda letter from the Listing Qualifications Department of NASDAQ indicating thatwe failed to comply with the minimum bid price requirement for continuedlisting because the bid price for our common stock had fallen below the $1minimum required for more than 30 consecutive days and that if the situationwas not remedied within 180 days of the notice our common stock would bedelisted.  We can regain compliance if, any time before July 4, 2007, the bidprice of our common stock closes at or above $1.00 per share for a minimum of10 consecutive business days.

In addition, we have beeninformed by NASDAQ that, upon the sale of the DR business, we will beconsidered a "shell company" and will therefore be delisted within 10 days ofthe consummation of the sale of the DR business.  Upon delisting, we expectthat there will be no active public trading market for our common stock, andour board may consider deregistering our securities under the SecuritiesExchange Act.

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The following table sets forththe range of the high and low sales prices per share of the common stock forthe fiscal quarters indicated, as reported by NASDAQ. Quotations representactual transactions in NASDAQ's quotation system but do not include retailmarkup, markdown, or commission.

| ** **     | 2006  | ** ** | 2005 |
|----------------|-------|------------|------|
|                | High  | Low   |      | High | Low  |
| First quarter  | $4.14 | $2.71      |      | $5.61 | $3.92 |
| Second quarter | $3.10 | $1.84      |      | $4.84 | $3.38 |
| Third quarter  | $2.18 | $0.90      |      | $4.70 | $3.30 |
| Fourth quarter | $1.90 | $0.55      |      | $4.42 | $2.40 |

We had approximately 700shareholders of record and 3,200 beneficial holders as of December 31, 2006. We have not declared or paid any dividends on our common stock.  We currentlyintend to retain earnings for use in our business, therefore, we do notanticipate paying cash dividends to common shareholders in the foreseeablefuture.  In the past, our credit facilities with LaSalle Bank N.A. and morerecently, the Asset Purchase Agreement with Vector Capital restricted thepayment of dividends to shareholders.

As discussed inItem 1. Business - Liquidation and Dissolution Activities, on March 15, 2007 ourstockholders approved a plan of dissolution, pursuant to which the company willbe dissolved and its assets liquidated.  We intend to close our stocktransfer books and discontinue recording transfers of our common stock at theclose of business on the date we sell or shutdown our Discovery Researchbusiness, which we refer to as the "final record date."  Thereafter,certificates representing our common stock shall not be assignable ortransferable on our books except by will, intestate succession or operation oflaw and we shall cease issuing stock certificates (other than replacementcertificates).  Accordingly, it is expected that trading in our commonstock will cease after the consummation of the sale of the DR business. 

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**ITEM 6.  SELECTED FINANCIAL DATA**

The following table sets forthselected consolidated financial information for each of the five most recentfiscal years.  This information should be read in conjunction with theConsolidated Financial Statements and the notes thereto, included in Part II,Item 8 of this report, Management's Discussion and Analysis of FinancialCondition and Results of Operations, included in Part II, Item 7 of thisreport, and the Forward-Looking Statement/Risk Factors disclosure contained inthe Introduction and in Part I, Item 1A of this report.

| **Selected  Consolidated Financial Data**                                                   |                         |                     |                     |                     |
|---------------------------------------------------------------------------------------------|-------------------------|---------------------|---------------------|---------------------|
|                                                                                             |                         |                     |                     | Year ended          |  |  |
| **Consolidated Statements  of Operations**                                                  | **12-31-06**            | 12-31-05*           | 12-31-04*           | 12-31-03*           | 12-31-02* |
| In thousands, except per share amounts                                                      | ** **              |                     |                     |                     |  |
| *Net Sales:*                                                                                |                         |                     |                     |                     |  |  |
|      Discovery  informatics licenses & support                 | **$ 23,395 ** | $ 24,857  | $ 24,639  | $ 23,702  | $ 22,182  |
|      Discovery  informatics services                               | **3,957 **         | 3,076          | 4,005          | 3,241          | 7,956  |
|      Hardware                                                      | **32 **            | 48             | 131            | 960            | 937  |
|         Total  net sales                            | **27,384 **        | 27,981         | 28,775         | 27,903         | 31,075  |
| *Cost of sales*                                                                             | **9,530 **         | 8,581          | 8,297          | 8,361          | 11,117  |
| *Gross profit*                                                                              | **17,854 **        | 19,400         | 20,478         | 19,542         | 19,958  |
| *Operating expenses:*                                                                       | ** **              |                     |                     |                     |  |
|      Sales  and marketing                                          | **9,728 **         | 9,435          | 11,343         | 12,325         | 14,129  |
|      Research  and development                                     | **7,034 **         | 7,712          | 7,678          | 9,489          | 9,123  |
|      General  and administrative                                   | **5,501 **         | 5,322          | 6,024          | 5,713          | 4,997  |
|      Restructuring  charge                                         | **120 **           | --        | --        | --        | --   |
|      Impairment  charge                                            | **100 **           | --        | --        | --        | --   |
|         Total  operating expenses                   | **22,483 **        | 22,469         | 25,045         | 27,527         | 28,249  |
| Income (loss) from  operations                                                              | **(4,629)**             | (3,069)             | (4,567)             | (7,985)             | (8,291) |
| Other income (expense), net                                                                 | **26 **            | (1,680)             | 452            | 9,213          | 3,382  |
| Income (loss) before income  taxes                                                          | **(4,603)**             | (4,749)             | (4,115)             | 1,228          | (4,909) |
| Income tax expense  (benefit)                                                               | **341 **           | (270)               | 210            | 1,569          | (1,668) |
| Net loss from continuing  operations                                                        | **(4,944)**             | (4,479)             | (4,325)             | (341)               | (3,241) |
| Preferred dividends                                                                         | **919 **           | --             | --             | --             | 37  |
| Net loss from continuing  operations allocable to common shareholders                       | **(5,863)**             | (4,479)             | (4,325)             | (341)               | (3,278) |
| Income (loss) from  discontinued operations, net of taxes, allocable to common shareholders | **(32,730)**            | 191                 | 4,557          | 2,441          | 3,273  |
| Net income (loss) allocable  to        common shareholders         | **$ (38,593)**     | $ (4,288)      | $ 232     | $ 2,100   | $ (5) |
|                                                                                             | ** **              |                     |                     |                     |  |
| Basic & diluted loss  from continuing operations per share                              | **$ (0.57)**       | $ (0.44)       | $ (0.47)       | $ (0.04)       | $ (0.38) |
| Basic & diluted  income  (loss) from discontinued operations per share  per share  | **$ (3.20)**       | $ 0.02    | $ 0.50    | $ 0.27    | $ 0.38  |
| Basic & diluted income  (loss) allocable to common shareholders per share               | **$ (3.77)**       | $ (0.42)       | $ 0.03    | $0.23          | $(0.00) |
| Basic & diluted  weighted average   number of shares                                    | **10,237 **        | 10,096         | 9,206          | 8,949          | 8,615  |
| ** **                                                                                  |                         | * *            |                     |                     | ** ** |
| **Consolidated Balance  Sheet Data**                                                        | *(at year end)*         |                     |                     |                     | ** ** |
| Working capital (deficit)                                                                   | **$(18,333)**           | $(3,068)            | $(3,077)            | $ 744     | $ 12,625  |
| Total assets                                                                                | **33,674 **        | 66,816         | 73,122         | 71,695         | 62,971  |
| Long-term obligations, less  current portion                                                | **-- **            | 5,951          | 338            | 3,915          | 7,382  |
| Series C preferred stock                                                                    | **3,932 **         | --        | --             | --             | --  |
| Total shareholders' equity                                                                  | **$ (9,046)**      | $ 29,513  | $ 27,866  | $ 26,994  | $ 30,324  |

* Prior year amounts have been restated to reflectdiscontinued operations. 
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**ITEM7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS**

The following discussionshould be read in conjunction with the audited consolidated financialstatements and notes thereto.

Except for thehistorical information and statements contained in Management's Discussion andAnalysis of Financial Condition and Results of Operations("MD&A"), the matters and items contained in this document,including MD&A, contain certain forward-looking statements that involveuncertainties and risks, some of which are discussed below, including, underthe caption "Cautionary Statements-Additional Important Factors to beConsidered."  We are under no obligation to update any forward-lookingstatements in this section.  Words such as "expects,""anticipates," "projects," "estimates,""intends," "plans," "believes," and variations ofsuch words and similar expressions are intended to identify suchforward-looking statements.

**Overview**

** **

On March 20, 2007, wecompleted the sale of the company's Discovery Informatics ("DI") business to asubsidiary of Vector Capital Corporation.  In addition, on March 15, 2007 theshareholders approved the plan of liquidation and liquidation of Tripos.  Management'sdiscussion and analysis of the financial condition and results of operationsdescribes how the company's DI unit performed in the periods presented in theaccompanying financial statements.  DR is reported as discontinued operationsfor the reasons set forth in Note 26 of the Notes to Consolidated FinancialStatements.  Because the DI business has been sold prior to the date of this annualreport on Form 10-K, we have condensed our remarks regarding DI in theManagements Discussion & Analysis section.

** **

** **

**ITEM7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS (continued)**

** **

**CriticalAccounting Policies**

The following information is provided in orderto illustrate which accounting policies management deems to be the mostcritical in the computation of the financial statements included later in thisForm 10-K.  The preparation of ourfinancial statements requires management to make estimates, assumptions andjudgments that affect the reported amounts of assets, liabilities, revenue andexpenses during the reporting period.  By the nature of the accounts, our criticalaccounting policies usually involve a higher degree of management judgment.

** **

*Revenue Recognition*...the following are therevenue recognition policies for each of our offerings:

**Discovery Informatics Licenses and Support**

** **

The Company recognizes revenues in accordancewith the American Institute of Certified Public Accountants (AICPA) Statementof Position (SOP) 97-2, "Software Revenue Recognition," as amended. Revenues from software license agreements are recognized when each of thefollowing criteria is met as set forth in paragraph 8 of SOP 97-2: (1)persuasive evidence of an arrangement exists, (2) delivery has occurred, (3)the fee is fixed or determinable, and (4) collectibility is probable.

The Company allocates revenues on perpetualsoftware arrangements involving multiple elements to each element based on therelative fair values of each element.  The Company's determination of fairvalue of each element in multiple element arrangements is based onvendor-specific objective evidence (VSOE).  The Company limits its assessmentof VSOE for each element to the price charged when the same element is soldseparately by the Company.  The Company has analyzed all of the elementsincluded in its multiple-element arrangements and determined that it hassufficient VSOE to allocate revenues to maintenance and support services, andtraining.  The Company sells training separately and has established VSOE onthis basis.  VSOE for maintenance and support is determined based upon therenewal rates in contracts themselves, which is based on a fixed percentage ofthe current perpetual license list price.  Accordingly, assuming all otherrevenue recognition criteria are met, revenues from perpetual licenses arerecognized upon delivery of the software using the residual method inaccordance with SOP 98-9, "Modification of SOP 97-2, Software RevenueRecognition, with Respect to Certain Transactions." Revenues fromperpetual software license sales fluctuate based on the size and number oftransactions completed during any fiscal period.

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**ITEM 7.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)**

**CriticalAccounting Policies (continued)**

Software maintenance agreements providetechnical support and the right to unspecified enhancements and upgrades on a"when-and-if-available" basis.  Post-contract customer supportrevenues on perpetual agreements are recognized ratably over the term of thesupport period (generally one year), and training and other service revenuesare recognized as the related services are provided.  Any unrecognized portionof amounts paid or billed in advance for licenses and services is recorded asdeferred revenue.  Revenues from post-contract support are derived from salesto new customers and renewals from existing customers.  The renewal rate for2006 was over 83%.

Term and bundled licenses represent time-basedlicense arrangements for one or multiple software products that are sold withmaintenance and support for the term of the license arrangement.  The Companydoes not have VSOE to determine fair value of the maintenance and support interm arrangements.  The Company recognizes revenues from these bundledtime-based licenses ratably over the license term, which is typically 1 to 3years.  Revenues from time-base license arrangements are derived from sales tonew customers and renewals from existing customers.  Historical renewal rateshave averaged over 80% the past three years.

Forpresentation in the statement of operations, license revenues and PCS arecombined as allowed under GAAP due to the amount of revenues obtained from PCSwhen charged separately being immaterial in comparison to the total of thesetwo sources. 

**Discovery Informatics Services**

Discovery Informatics Services (DIS) representscontracts for the development and delivery of enterprise-wide customizedsoftware (such as laboratory information systems or database integrationprojects).  Technological feasibility exists on these software arrangements andthey typically include installation at the customer's site.  We account forthese arrangements in accordance with SOP 81-1, as required by SOP 97-2 sincethe contract to deliver software and installation requires significantproduction, modification or customization of software.

In applying the provisions of SOP 81-1 thepercentage of completion is utilized.  For contracts where customer approval ofcontractually required tasks must occur at each distinct milestone, and whereamounts billable are indicative of progress-to-completion, we record revenueswhen a milestone has been met and accepted by the customer.  For contractswithout distinct milestones, we measure progress using the cost-to-cost method(cumulative costs as a percentage of total expected costs to complete), whichapproximates progress towards completion.

DIS also includes software development projectsthat are contractual arrangements with customers for use of Tripos softwaredevelopers in an effort to develop a scientific software tool for use in drugdiscovery.  The contractual arrangements are on a "commerciallyreasonable" basis, and the customer is subject to billings on a time andmaterials basis.  Accordingly, we record the related revenue when the time andcosts are incurred at the stated contractual rates.

**Discovery Research Services**

Discovery Research sales include sales ofchemical compounds from (1) inventory, (2) long-term contracts to design andproduce chemical compounds to customer specifications, or (3) contracts toperform discovery research activities. 

Tripos recognizes revenue from the sale ofchemical compounds upon shipment of the products, FOB shipping point, to thecustomer.  This practice is consistent with the four criteria required forrevenue recognition listed in paragraph 1 of Staff Accounting Bulletin("SAB") 101 issued by the U.S. Securities and Exchange Commission("SEC").  For chemical compound transactions, persuasive evidence ofan agreement exists upon the receipt of a contract outlining the purchase andusage terms of the compounds.  A purchase order may also be received asconfirmation.  As stated above, revenue is not recognized until the compoundshave been shipped to the customer.  The selling price for compounds is fixedaccording to the terms of the contract or customer's purchase order.  Paymentterms for chemical compound transactions are Net 30 days.  The Company hasexperienced very few bad debts arising from these transactions; as a result,collectibility is reasonably assured.

In accordance with SOP 81-1, salesderived from long-term contracts to design and produce chemical compounds tocustomer specifications are recorded using the percentage of completion methodas the compounds are delivered (under 

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**ITEM 7.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)**

** **

**CriticalAccounting Policies (continued)**

the units of delivery method).  The contractcosts related to delivered compounds are recorded to cost of sales as thecompounds are delivered and revenue is recognized.

Discovery Research activities involve lead-compoundoptimization projects, custom synthesis, and compound design.  These contractsgenerally call for non-refundable contractual fees tied to time and materials. Accordingly, revenues under contracts of this type are recorded on a time andmaterial basis.  When contracts to perform discovery research activitiesrequire a specific deliverable, the direct and incremental contract costs aredeferred.  Revenue and the contract costs are then recorded upon delivery andacceptance.

An access fee for our LeadDiscovery programs isrecognized upon completion of a materials transfer agreement and shipment ofselected compounds to the customer for screening purposes.  Should the customerdecide to retain exclusive rights to promising compounds in the selection, anadditional fee is required.  Customers may engage Tripos for discovery researchservices to further refine the lead compound for additional fees.

For presentation in the statement of operations,compound revenues and project revenues are combined as allowed under GAAP dueto the amount of revenues obtained from compounds when charged separately beingimmaterial in comparison to the total of these two sources. 

**Hardware Sales**

Hardware sales are recorded upon delivery. 

*Valuation of Accounts Receivable*...Due to the nature andcredit quality of our customer base (principally major pharmaceuticalcompanies, universities and larger biotechnology companies), provision for baddebts is typically calculated on a case-by-case basis and takes into considerationthe age of the outstanding receivable amount by customer, the customer's cashposition, and the geographic location of the customer.  Historically, we have avery low experience rate of uncollectible amounts.  Management believes thatalternative methods for calculating allowances for bad debts such as percentageof net sales or percentage of past-due receivables do not reflect our lowerexperience rates and thus that the specific identification method is moreappropriate. If the financial conditionof our customers were to deteriorate, resulting in an impairment of theirability to make payments, additional allowances may be required. We continuallyevaluate the adequacy of our allowance for doubtful accounts and makeadjustments in the periods any excess or shortfall is identified. 

** **

*Software Development Costs...C*osts related to newproducts are capitalized after the establishment of technological feasibility(working model) in accordance with Statement of Financial Accounting Standards("SFAS") No. 86.  Amortization of capitalized software developmentcosts is provided on a product-by-product basis as the greater of (a) the ratioof current gross revenues for a product to the total current and anticipatedfuture gross revenues or (b) the straight-line method over the remainingestimated economic life of the product.  Currently, we use an estimatedeconomic life of three to five years for all capitalized software developmentcosts.  We assess the recoverability of capitalized software development costs bycomparing the remaining unamortized balance to the net realizable value of therelated product.  Any excess is written off. These write-offs could besignificant if we are unable to penetrate a market with a new product orexperience a decline in revenues from older capitalized products.

*Capitalization and Valuation of ChemicalCompound Costs*...Initial**costs to develop our LeadQuest compounds (chemical compounds for sale foruse in drug discovery) are categorized as research and development expenseuntil such time it becomes probable that a saleable library can be successfullyproduced.  Therefore, costs for design, research, and analytical procedures forevery library of compounds are expensed as incurred.  Our research chemistsreview the results of analytical procedures to determine if the chemicalreactions completed as expected and the product purity and product yields arewithin acceptable tolerances.  This "validation" process determineswhether the chemistry is successful and if a saleable product will result.  Wecapitalize costs to inventory once the validation process is completed andsuccessful production is reasonably assured.  If the core reaction isunsuccessful, the library template is abandoned and no further developmenttakes place.  

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**ITEM 7.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)**

** **

**Critical Accounting Policies (continued)**

Similarly, we capitalize the costs ofLeadDiscovery packages once we are reasonably assured of the success of theunderlying chemistry.  After this point we capture the costs of labor,chemicals and screening activity into work in process inventory.  Should aLeadDiscovery library not reach its full potential as a standalone offering, wecan utilize the products within discovery research contracts for customers orin our LeadQuest compound library.

Inventory amounts shown in the ConsolidatedBalance Sheet are net of an obsolescence reserve.  In calculating the reservefor inventory held for sale, the age and sales trends of each category in theinventory are taken into account to determine the net realizable value.  Anyshortfall between the carrying cost of the inventory and the net realizablevalue is provided for in the reserve.  A portion of the LeadQuest inventory isused in discovery research projects.  This portion of the inventory asset isdepreciated over its 10-year expected useful life. 

*Property,plant and equipment*...All assetsreflected under this category on our Balance Sheet are held for use in theoperations of Tripos.  Due to the fast-paced development of new technologies incomputer hardware and laboratory equipment, we closely monitor the originallife expectancies of new purchases and set our depreciation or amortizationrates accordingly to best match the economic useful life of the asset.  Assetsor equipment that are no longer of use to the organization are written down totheir realizable value and then disposed. 

*Income taxes*. Tripos computes income taxes using theasset and liability method prescribed by Statement of Financial AccountingStandards No. 109 "Accounting for Income Taxes".  The primarydifference between financial statement income and taxable income results fromthe use of different methods of computing depreciation, capitalized developmentcosts, and other timing differences.  The effective tax rate differs from thestatutory tax rate primarily due to the impact of research and developmentcredits, which are subject to interpretation of US federal tax regulations, andthe change in valuation allowance related to net operating losscarry-forwards.  Our methodology for recording income taxes requires asignificant amount of judgment in the use of assumptions and estimates.  Additionally, we use forecasts of certain taxelements such as taxable income and foreign tax credit utilization, as well asevaluate the feasibility of implementing tax planning strategies.  Given theinherent uncertainty involved with the use of such variables, there can besignificant variation between anticipated and actual results.  Unforeseenevents may significantly impact these variables, and changes to these variablescould have a material impact on our income tax accounts*.*

*Goodwill and other intangible assets.*The costs of acquiredcompanies are allocated first to their identifiable tangible and intangibleassets based on estimated fair values.  Costs allocated to identifiableintangible assets are generally amortized on a straight-line basis over theremaining estimated useful lives of the assets.  The excess of the purchaseprice over the fair value of identifiable assets acquired, net of liabilitiesassumed, is recorded as goodwill and is subject to impairment tests at leastannually as required by Statement of Financial Accounting Standards No. 142, "Goodwilland Other Intangible Assets."  If the impairment tests indicate that thecarrying value of goodwill exceeds its fair value, an impairment loss would berequired to be recognized in the consolidated statements of operations in anamount equal to the excess carrying value.In performing our impairment tests, the estimated fair value was based on adiscounted cash flow analysis. Assumptions and estimates about future cashflows and discount rates are often subjective and can be affected by a varietyof factors, including external factors such as economic trends and governmentregulations, and internal factors such as changes in our forecasts or in ourbusiness strategies. We believe the assumptions used in our impairment analysisare reasonable and appropriate; however, different assumptions and estimatescould affect the results of our impairment analysis and in turn result in animpairment charge. If an impairment loss should occur in the future, it couldhave a material adverse impact on our financial results.

*Basis of  accounting*. Effective  with the shareholder approval on March 15, 2007 of our plan of liquidation,  we change the basis of accounting from the going-concern basis to a  liquidation basis for all periods subsequent to March 15, 2007.  Under the  liquidation basis of accounting, assets are recorded at their estimated  realizable amounts and liabilities that will be paid in full are recorded at  the present value of amounts to be paid.  Under the liquidation basis of  accounting, the net present value of the estimated remaining costs to be  incurred during liquidation (exclusive of interest expense) is accrued.  We  will use estimates for professional fees, legal matters, compensation and  benefits for the remaining employees, and other miscellaneous general and  administrative costs in computing the accrual of liquidation costs.  We  expect there to be changes made to these estimates and will recognize such  changes in future periods as a change in net liquidation liabilities.   Current estimates are based in large part on the time required to settle all  matters of the 

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**ITEM7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS (continued)**

Company. If there are delays, actual costs incurred during liquidation could increase asa result of the need for additional internal and external resources.

The following information should be read inconjunction with the information contained in the Consolidated FinancialStatements and Notes thereto appearing elsewhere in this Annual Report on Form10-K.

** **

**Results of Operations**

 The following table sets forth, for the periodsindicated, certain consolidated financial data as a percentage of net sales,(except costs of sales data, which is set forth as a percentage of thecorresponding net sales data):

|  |                                                                         |                                               | **2006**            |          | 2005      |          | 2004      |
|--|-------------------------------------------------------------------------|-----------------------------------------------|---------------------|----------|-----------|----------|-----------|
|  | Net  sales:                                                             |                                               |                     |          |           |          |
|  |                                                                         | Discovery  informatics licenses & support | **85%**             |          | 89%       |          | 86%       |
|  |                                                                         | Discovery  informatics services               | ** 15 **  |          | 11   |          | 14   |
|  |                                                                         | Hardware                                      | **-- **        |          | --   |          | --   |
|  |                                                                         |    Total net sales                       | **100 **       |          | 100  |          | 100  |
|  | Cost  of sales: *                                                       | ** **                                    |                     |          |           |          |
|  |                                                                         | Discovery  informatics licenses & support | ** 23 **  |          | 25   |          | 21   |
|  |                                                                         | Discovery  informatics services               | ** 103 ** |          | 75   |          | 73   |
|  |                                                                         | Hardware                                      | ** 85 **  |          | 86   |          | 81   |
|  |                                                                         |    Total cost of sales                   | ** 35 **  |          | 31   |          | 29   |
|  | Gross  profit                                                           | ** 65 **                            |                     | 69  |           | 71  |
|  | Operating  expenses:                                                    | ** **                                    |                     |          |           |          |
|  |                                                                         | Sales  and marketing                          | ** 36 **  |          | 34   |          | 39   |
|  |                                                                         | Research  and development                     | ** 26 **  |          | 28   |          | 27   |
|  |                                                                         | General  and administrative                   | ** 20 **  |          | 19   |          | 21   |
|  |                                                                         |    Total operating expenses              | ** 82 **  |          | 80   |          | 87   |
|  | Income  (loss) from operations                                          | **(17) **                                |                     | (11)     |           | (16)     |
|  | Interest  income                                                        | **--  **                            |                     | --  |           | --  |
|  | Interest  expense                                                       | **(6) **                                 |                     | (3)      |           | (1)      |
|  | Other  income (expense), net                                            | **6 **                                   |                     | (3)      |           | 3   |
|  | Net  loss before income taxes                                           | **(17) **                                |                     | (17)     |           | (14)     |
|  | Income  tax expense (benefit)                                           | ** 1 **                             |                     | (1)      |           | 1   |
|  | Net  loss from continuing operations                                    | **(18) **                                |                     | (16)     |           | (15)     |
|  | Preferred  dividends                                                    | **3 **                                   |                     | --  |           | --  |
|  | Net  loss from continuing operations allocable   to common shareholders | **(21) **                                |                     | (16)     |           | (15)     |
|  | Income  (loss) from discontinued operations, net of tax                 | **(120) **                               |                     | 1   |           | 16  |
|  | Net  income (loss) available to common shareholders                     | **(141)%**                                    |                     | (15)%    |           | 1%       |

* As a percentage of thecorresponding sales

** **

** **

**Net Sales.**  Total net sales decreased 2% to $27.4million in 2006 from $28.0 million in 2005, which was down 3% from the $28.8million recorded in 2004.  In 2006 Discovery informatics licenses and supportdecreased 6% or $1.5 million.  Our informatics services business experienced anincrease in revenues of 29% or $0.9 million in 2006 compared to 2005, which wasdown by 23% from 2004.  Net sales from our activities outside of North Americarepresented approximately 52%, 56% and 60% of total net sales in 2006, 2005 and2004, respectively, with Europe accounting for 44%, 47% and 50%, and the remaindercoming from customers in the Pacific Rim.  

Total Discovery Informatics licenses and supportsales decreased 6% to $23.4 million from $24.9 million in 2005 which was up 1%from 2004's $24.6 million.  This decrease was primarily due to lower supportrevenues in the Pacific Rim and decreased new product sales in 2006.  The 2005revenues also included $0.4 million from the early termination agreement with acustomer.  The majority of our software licenses are time-based from which thecorresponding revenue is recognized on a ratable basis over the length of eachlicense term (typically 1 to 3 years). Revenue recognition from time-basedsoftware license arrangements will normally stretch into subsequent periodsdepending on the length of individual contract terms.  

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**ITEM 7.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)**

Discovery Informatics service revenues increasedin 2006 by 29% to $4.0 million after decreasing by 23% in 2005 to $3.1 millionfrom $4.0 million in 2004.  The increase in 2006 revenues is principallyattributable to work being performed for Wyeth Pharmaceuticals for the developmentand implementation of our Benchware Discovery 360 technologies.  The timing ofrevenue recognition from discovery informatics services is typically subject toachievement of contractual milestones or progress on projects accounted forunder the percentage of completion method and thus varies from period toperiod.  The 2005 decrease in discovery informatics service revenues wasprimarily attributable to the completion of a multi-year project with ScheringAG along with smaller active projects in 2005.   

Hardware revenues declined 33% in 2006 to$32,000 from $48,000 in 2005, which was down 63% compared to the $131,000 in2004.  The high-end server and workstation equipment that we historically soldto our customers continues to face growing competition from lower costalternatives.  We do not aggressively promote hardware due to its low-margin,but rather only facilitate customer demand when required.

**Cost of Sales. **Total cost of sales increasedto $9.5 million in 2006, up 11% from 2005's $8.6 million, which in turn was up3% from $8.3 million in 2004.  These costs represent 35%, 31% and 29% of totalnet sales, respectively. 

Costs****of discovery informatics licensesand support represented 23%, 25% and 21% of software license and support salesin 2006, 2005 and 2004, respectively.  Costs of software licenses and supportconsist of amortization of software products acquired in the Optiveacquisition, amortization of capitalized software, product royalties tothird-party developers, commissions to Pacific Rim distributors, the cost ofsoftware product packaging and media, the costs related to staffing telephonesupport functions, packaging for updates/upgrades, and updates todocumentation.  Staffing costs are expected to increase in future periods at ornear the rates of cost of living increases.  Included in the 2005 cost of saleswas a write-down in the carrying cost of our ChemCoreRIO software asset of $1.3million.  We analyzed the net realizable value of the asset based on ourassessment of the market for the product given our current investment in salesand marketing for it, and determined that a reduction in the amount capitalizedwas appropriate in spite of our belief that it is a valuable asset for futuredevelopment.  In addition, the 2006 and 2005 costs of sales include $382,000 ofamortization expense related to software products acquired in the January 2005acquisition of Optive Research.  Cost of sales as a percent to software saleshas increased over the past few years due to a change in the mix of internal versusthird-party products sold, resulting in higher royalty payments.  The effectiverate of royalties may continue to fluctuate in future periods.  

Costs of discovery informatics services (DIS)represented 103%, 75% and 73% of discovery informatics service revenues in 2006,2005 and 2004, respectively.  Costs of DIS are direct charges for staff, traveland overhead required to develop custom software solutions for clients.  Muchof the 2006 revenues and costs in the discovery informatics services businessresult from the project with Wyeth Pharmaceuticals announced on January 11,2006.  In the third and fourth quarters of 2006 we determined that changes tothe plan would be required on this "Next-Generation Discovery IT" projectresulting in incremental costs to complete the assignment.  As a result of theincremental costs, the cumulative percentage of revenue to be recognized was adjusted. Based on current estimates, we anticipate this project will be completed at approximately$0 margin.  The timing of revenue recognition from discovery informaticsservices may fluctuate during any period based on achievement of contractualmilestones or changes in overall cost estimates for "percentage completion"contracts.

Costs of hardware represented 85%, 85%, and 81%of hardware sales in 2006, 2005 and 2004, respectively.  Cost of sales forhardware consists of the direct costs to us of the equipment sold.

**Gross Profit**was $17.9 million in 2006, $19.4 millionin 2005 and $20.5 million in 2004, which represents gross margin of 65%, 69%and 71%, respectively.  The decrease in gross margin in 2006 is primarilyattributable to the lower margin discovery informatics services businessbecoming a larger percentage of revenues.  The decrease in gross margin in 2005compared to 2004 is attributable to the increase in the effective rate ofroyalties on discovery informatics products, the write-down of $1.3 milliontaken on our ChemCore Rio capitalized software asset.  Gross profit for theCompany is dependent on the mix of discovery informatics licenses and supportversus discovery informatics services business, the mix of internal versusthird-party software product sales, foreign exchange rates and the company'sability to successfully deliver on informatics contracts.

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**ITEM 7.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)**

** **

**Sales and Marketing Expenses**increased 3% to $9.7million in 2006 from $9.4 million in 2005, which was a decrease of 17% from$11.3 million in 2004.  Sales and marketing expenses represented 36%, 34% and39% of 2006, 2005, and 2004 total net sales, respectively.  During 2005, werealized expense savings in the Sales and Marketing organization due to loweremployee costs from open positions, lower commissions, and lower travel expense.

**Research and Development Expenses**decreased 9% in 2006 to$7.0 million from $7.7 million in 2005, which was up 1% from $7.6 million in2004.  R&D costs represented 26%, 28%, and 27% of net sales in 2006, 2005and 2004, respectively.  The decrease in R&D expenses in the current yearis primarily attributable to reduced levels of travel and reduced consultingcosts in 2006.  

Research and development expenses, including theamount of capitalized costs were $7.8 million in 2006, $9.4 million in 2005,and $8.3 million in 2004.  Capitalized software development totaled $0.8million, $1.7 million and $0.6 million in 2006, 2005 and 2004, respectively.  Inaccordance with Statement of Financial Accounting Standards No. 86, the Companycapitalizes software development costs for external use.  Tripos anticipatesthat its investment in new product research will continue to be significant aswe develop new software modules each year, work on funded software researchcontracts with customers, and develop new technologies for use in ourinformatics consulting work.

**General and Administrative Expenses**increased 3% to $5.5million in 2006 from the $5.3 million in 2005 which was down 12% from the $6.0million in 2004.  G&A expenses represented 20%, 19% and 21% of net salesfor 2006, 2005 and 2004, respectively.  G&A expense for 2006 includedapproximately $1.0 million of costs related to the strategic alternativesprocess.  Absent these costs, G&A would have been lower reflecting reduced legalfees, lower public company costs, and reduced headcount.  The decrease ingeneral and administrative expenses in 2005 was attributable to lower bonus andreduced legal and professional fees.  

**Restructuring Expenses**in 2006 represents arestructuring of our US based employees that resulted in a reduction of ninepositions.  As a result of these actions, the Company recorded pre-taxrestructuring charges of approximately $120 in the first quarter 2006 relatedto our Discovery Informatics division for one-time termination benefits andoutplacement costs.  

**Impairment Expenses**in the fourth quarter of2006 represent an impairment expense of $100 was recorded on our St. Louisheadquarters, based on expected proceeds from the sale of the building comparedto its carrying cost.  

**Interest Income**was $88,000 in 2006,$86,000 in 2005 and $63,000 in 2004.  The increases from the 2004 levelreflects increases in interest rates rather than changes in the average amountof cash on hand in 2006 and 2005.

**Interest Expense**of $1.5 million in 2006,$1.0 million in 2005 and $0.5 million in 2004 was from interest due on thelong-term note payable for the corporate building, interest due on ourline-of-credit, interest costs associated with our capital leases and interestin 2006 and 2005 related to the subordinated note issued in the acquisition ofOptive Research.  In January 2005, we issued a $3.5 million subordinatedpromissory note with a stated interest rate of 11.4 % as part of considerationin the Optive acquisition.  Interest expense associated with the subordinateddebt totaled $628,000 and $453,000 in 2006 and 2005 respectively.  Interestexpense has varied commensurate with the change in average outstanding debtbalances to finance the various activities, including the acquisition of OptiveResearch in 2005.  The floating rate incurred by the Company on the mortgagenote averaged 7.7% in 2006 and 5.5% in 2005.  The interest rate incurred on ourline of credit was 8.3% in 2006 and 6.5% in 2005.  Interest rates on our capitalleases range from 3% to 8%.

**Other Income (expense)**was $1.5 million in 2006,$(0.8) million in 2005 and $0.9 million in 2004.  Included in 2006 is the lossof $0.8 million on the sale of our investment in the A.M. Pappas Life ScienceVentures II fund, the non-cash gain on the revaluation of common stock warrantsof $0.9 million, and currency gains of $1.3 million.  In 2005 we sold our33,000 shares of NuVasive, Inc. realizing a gain of $240,000 along with netgains of $101,000 on our investment in the AM Pappas Life Science II Fund. These gains in 2005 are offset by $1.1 million of currency losses due to thestrength of the U.S. dollar against European currencies, offsetting gainsrealized in prior years.  Early in 2004 we sold the last of our holdings ofArena Pharmaceuticals, Inc. common stock and realized a gain of $144,000.  Theremainder of the 2004 other income was from foreign currency gains.

** **

** **

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**ITEM 7.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)**

** **

**Income Tax Expense (Benefit). **Our tax expense(benefit) from continuing operations was $341,000 in 2006, $(270,000) in 2005, and$210,000 in 2004.  The effective tax rates were 7.4%, (5.7)%, and 5.1% for 2006,2005 and 2004, respectively.  The effective tax rates for 2006, 2005 and 2004reflect management's current estimate of the distribution of earnings among thestatutory jurisdictions in which we operate and the valuation of certain taxcredits and net operating losses in the U.S. and U.K. for those tax years (eachending December 31).  The low tax rates result from excess deferred tax assets beingoffset by a valuation allowance.  The establishment of valuation allowances fordeferred tax assets does not impair our ability to use the deferred tax assetsupon achieving profitability in the related jurisdictions.  Upon therecognition of income in future periods in the jurisdictions where the deferredtax assets were created, release of the corresponding valuation allowances mayresult in a lower effective tax rate.

** **

**Liquidity and Capital Resources**

Operating Activities.  Net cash used in 2006operating activities was $5.7 million.  The primary uses of cash were from anet loss from continuing operations of $4.9 million, reductions in accountspayable and accrued expenses of $.3 million, and lower deferred revenues of $2.1million.  These uses of cash were partially offset by the add-back of non-cashitems such as: depreciation and amortization including the amortizations ofdebt discount and deferred issuances costs totaling $2.9 million, impairmentcharge of $100,000, and stock compensation expense of $289,000, in addition tocollections of account receivables of $1.8 million, and reduction of prepaidexpenses and other assets of $3.8 million.  The discontinued operations, DRbusiness unit, used $7.2 million of cash in its operations in 2006.  

 

Net cash provided in 2005 operating activitieswas $4.8 million.  Cash was used through the net loss from continuingoperations of $4.5 million, increases in accounts receivable of $679,000 andprepaid expenses of $167,000, along with decreases in deferred revenues of$511,000 less a gain from the sale of marketable securities of $545,000.  Theseuses were partially offset by the add-back of depreciation, amortization and awrite-down of the value of an investment held at cost totaling $3.6 million. Discontinued operations contributed $7.5 million of cash in 2005.  Amortizationfor 2005 included a $1.3 million charge for the write-down of the carryingvalue of our ChemCoreRIO software asset to its expected net realizable value. This software product remains valuable to the company for future projects, butis not currently projected to generate revenue in the near term. 

Net cash provided in 2004 operating activitieswas $12.6 million.  The uses of cash were primarily from the net loss fromcontinuing operations of $4.3 million, additions to prepaid expenses of$502,000 and payments on accounts payable and accrued expenses of $1.6 millionless a gain on the sale of marketable securities of $144,000.  These uses wereprincipally offset by the add-back of depreciation and amortization of $1.7million, collections of accounts receivable of $2.8 million and increases indeferred revenue of $1.7 million.  Discontinued operations contributed $12.7million of cash in 2004.  Amortization for 2004 included $0.9 million for thewrite-down of the carrying value of our ChemCoreRIO software asset to its thenexpected net realizable value.

 

Investing Activities.  Net cash provided by investingactivities in 2006 was $3.8 million, consisting of capitalized developmentcosts for our discovery informatics software products of $797,000, purchase ofproperty and equipment of $335,000 less the proceeds from the sale of marketablesecurities of $949,000.  Discontinued operations generated $4.0 million in 2006principally from the sale of excess property.  

Net cash utilized in investing activities during2005 was $7.3 million.  During 2005 we acquired Optive Research, consuming cashof $4.8 million, made new investments in equipment of $418,000, and invested innew informatics product development totaling $1.7 million.  We also madeadditional investments in the A.M. Pappas Life Science II fund of $311,000.  Wereceived $731,000 from the sale of marketable securities.  The DR discontinuedoperations used $889,000 in 2005.

Net cash used in investing activities in 2004was $110,000.  During 2004 we invested $213,000 in computer equipment for ourdiscovery informatics area.  Also in 2004 we invested an additional $286,000 inthe A.M. Pappas Life Science II fund plus $639,000 in new informatics productdevelopment.  We realized proceeds of $196,000 from the sales of marketablesecurities.  The discontinued operations unit generated $832,000 of cash in2004.

Financing  Activities.  Net cash used in financing activities in 2006 was$616,000, consisting of borrowings under our revolving line of credit of $8.7million, net proceeds from the issuance of convertible preferred stock of $4.9million, and proceeds from stock issuance pursuant to stock purchase and optionplans of $276,000.  These were offset by

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**ITEM 7.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)**

payments on long-term debt and capital leaseobligations totaling $11.1 million along with dividend payments on thepreferred stock amounting to $382,000 and cash consumed by discontinuedoperations of $2.9 million principally for payments on capital leases. 

Net cash provided by financing activities in2005 was $5.1 million, consisting of proceeds from the issuance of long-termdebt and capital leases of $3.7 million, borrowings on the revolving line ofcredit of $18.1 million and proceeds from stock options and stock purchase plansof $331,000.  During 2005 we made payments on long-term debt and capital leasesof $14.4 million.  Included in the proceeds from issuance of long-term debt is$3.5 million related to a promissory note we issued to fund the acquisition ofOptive Research.  The remaining proceeds were obtained from new financing.  Discontinuedoperations used $2.7 million of cash in 2005 primarily for payments on itscapital leases.

Net cash utilized in financing activities during2004 was $9.6 million.  During 2004 we obtained access to cash by drawing atotal of $8.4 million from our line of credit and by issuing shares from ourstock plans for $941,000.  We made payments totaling $15.3 million on debt andcapital leases.  Our discontinued operations unit used $3.6 million of cash in2004.

Asof December 31, 2006, we had a credit agreement with LaSalle Bank N.A. for a $3.5million mortgage note and a $6.0 million revolving line of credit agreement,with a balance outstanding of $3.5 million, with LaSalle Bank.  The Bank andthe company entered into amendments to the line of credit facility to extendits maturity from January 1, 2007 to March 21, 2007.  Both credit agreementswere collateralized by substantially all of our U.S. assets and stock pledgesfor each of the U.S. and U.K. subsidiaries.  

The company paid the outstanding balance of themortgage loan and the line of credit with the proceeds from the sale of theassets of the Discovery Informatics business to Vector Capital on March 20,2007.

**DISCONTINUED OPERATIONS**

Discontinued Operationsconsist primarily of our Discovery Research business.  We derive DiscoveryResearch revenues from our compound library product, LeadQuest, and discoveryresearch activities. The operating results of the DR unit are presented as asingle entry under the caption "Income (loss) from discontinued operations, netof taxes of $0, $(1,800) and $1,800, respectively, allocable to commonshareholders" on the enclosed Consolidated Statement of Operations.  Additionaldetails are provided in Note 26 of the Notes to Consolidated FinancialStatements.  Discovery Research revenues decreased 76% to $6.6 million in 2006from $27.4 million in 2005, which was 24% lower than the $36.0 millionrecognized in 2004.  The decrease in 2006 revenues resulted principally fromthe completion of the Pfizer compound file enrichment project in 2005, whichwas partially offset by higher compound sales and a 55% increase in non-Pfizerdiscovery research activity in 2006.  The decrease in 2005 revenues was primarilyattributable to lower levels of production as the four-year $90 millionstrategic compound file enrichment and hit follow-up contract with Pfizer movedtoward completion in late 2005.  This decline was coupled with lower compoundsales that were partially offset by incremental discovery research activitieswith new customers.  Discovery Research revenues from Pfizer were $0 in 2006compared to $23.2 million in 2005 and $32.1 million in 2004.  Other discoveryresearch activities increased in 2005 to $3.6 million from $2.0 million in 2004as capacity increased to take on new business.  Revenue related to discoveryresearch activities is recognized in accordance with SOP 81-1, under thepercentage of completion method using an output measure for revenue recognition(units of delivery method).  

Total cost ofsales decreased to $9.9 million in 2006, down 52% from 2005's $20.7 million,which in turn was down 15% from $24.5 million in 2004.  Costs of discoveryresearch products and services represented 151%, 76% and 68% of discoveryresearch sales in 2006, 2005 and 2004, respectively.  The cost of thediscovery research business is represented by the raw material, direct labor andoverhead costs to produce compound libraries and to deliver on contractedresearch projects.  Discovery research contracts may also includethird-party costs for production of larger quantities of intermediate orscale-up materials.  As a result, variability in cost of sales may beattributed to the mix of compound products and discovery research revenues. The increase in the 2006 costs of discovery research products and services as apercentage of sales was negatively affected by cost overruns on one contract andinitial stages on another that included pass-through costs from a third-partyvendor at no margin as well as price reductions for compound

|  17 |
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**ITEM 7.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)**

inventory sales.  Also,based on ongoing discussions regarding the sale of our Discovery Researchbusiness in the fourth quarter of 2006 we recorded an impairment charge of $2.4million to reduce the book value of the inventory.  The increase in the 2005cost of discovery research products and services as a percentage of sales isdue to production inefficiencies incurred in the winding down of the four-yearstrategic compound file enrichment and hit follow-up contract with Pfizer aswell as additional provisions of approximately $725,000 incurred on ourLeadQuest libraries as we performed a re-analysis of all compounds during2005.  

Gross profit (loss)****was$(3.3) million in 2006, $6.7 million in 2005 and $11.5 million in 2004, whichrepresents gross margin of (51)%, 24% and 32%, respectively.  The decrease ingross margin in 2006 compared to 2005 is primarily attributable to recording ofsignificant additional provisions to reduce the carrying value of inventory toapproximated the anticipated proceeds from the pending sale of the business inaddition to production inefficiencies resulting from the completion of thePfizer contract at the end of 2005.  The decrease in gross margin in 2005 isattributable to increased costs of production as a percentage of revenues onour Pfizer contract in discovery research, and additional provisions in the aswe performed a re-analysis of our LeadQuest Libraries.  

Sales and marketing expenses decreased 46% to $0.7million in 2006 from $1.2 million in 2005, which was comparable with $1.2 millionin 2004.  Sales and marketing expenses represented 11%, 5% and 4% of 2006,2005, and 2004 total net sales, respectively.  The increase in sales andmarketing expenses as a percentage of net sales increased in 2006 primarily dueto reduced sales as a result of the completion of the Pfizer contract at theend of 2005.

Research and development expenses****increased102% in 2006 to $6.4 million from $3.2 million in 2005, which was up 94% from$1.6 million in 2004.  R&D costs represented 97%, 11%, and 4% of net salesin 2006, 2005 and 2004, respectively.  The increase in R&D expenses as apercentage of net sales increased in 2006 primarily due to recording a grantrepayment obligation to the U.K. Department of Trade & Industry in additionto reduced sales as a result of the completion of the Pfizer contract at theend of 2005, as well as production inefficiencies resulting in greaternon-capitalizable costs remaining in R&D. The increased level of R&Dexpense in 2005 compared to 2004 reflects inefficiencies associated withcompleting the Pfizer contract in December as scientific staff was assigned tonon-billable research as well as additional non-capitalizable costs related toour LeadDiscovery program in the amount of $558,000.  The inefficiencies areattributable to less than optimal production quantities as the Pfizer workwound down along with the generation of redundant staff.  See restructuringexpense below for further details regarding reductions in force for ourDiscovery Research business that occurred in 2006.  Costs associated withinvestigating novel compound templates are classified as R&D up until suchtime as the base reaction is validated, after which costs are captured ininventory. 

Restructuring expensesin 2006 represent a reduction in force related to our Discovery Researchdivision.  On January 24, 2006 we completed a reduction in force for ourDiscovery Research business based in Bude, England that was initiated followingcompletion of the four-year $90 million file enrichment project for Pfizer. This action coincided with the conclusion of the 30-day consultation periodwith employees mandated by U.K law.  We reduced the number of employees at thelaboratory by 76 positions.  More than half of the employees affected left thecompany under a voluntary separation plan.  As a result of these actions, theCompany recorded pre-tax restructuring charges of approximately $807 in thefirst quarter 2006 related to our Discovery Research division for one-timetermination benefits and outplacement costs.  The Company further reducedstaffing levels on August 11, 2006 by 14 positions, resulting in a pre-taxrestructuring charge of $338.  We solicited and obtained voluntary terminationsfor all positions affected in exchange for one-time termination benefits andoutplacement costs.  This action was necessary in order to further streamlinethis business with the goal of obtaining positive cash flows from this businessfor the remaining months of the year.  In the fourth quarter of 2006 we had afurther reduction in force of 27 positions, resulting in a pre-tax restructuringcharge of $472.

In 2005 we incurred a restructuring chargerelated to a temporary laboratory building at our discovery research center. With the completion of the Pfizer contract in the forth quarter of 2005, thistemporary building was no longer needed for production activity.  The buildingwas not expected to be saleable in its present condition and alterations toqualify for permanent treatment with the local authorities would not haveincreased the market value.  As such, we recorded a restructuring chargerelated to this building in the amount of $861, reducing the net carrying valueto zero.

Impairment  expenses****in the third quarter of 2006 represent an impairment chargefor the amount of the loss on the sale of excess properties at our Bude, Englandresearch facility of $3.6 million.  The sale of the property wasaccomplished through a series of transactions that were completed in the fourthquarter.  The impairment charge represents the loss on

|  18 |
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**ITEM 7.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)**

the sale of thoseproperties that had a net book value of $4.9 million.  Also, based on ongoingdiscussions regarding the sale of our Discovery Research business in the fourthquarter of 2006 we recorded impairment expenses of 13.2 million related tobuildings and equipment located at our Bude, England location, and $1.1 millionto eliminate the carrying value of discovery research related goodwill.

Interest income****was$27,000 in 2006, $44,000 in 2005 and $64,000 in 2004.  The reduction from the2004 level reflects a decreasing average amount of cash on hand due to lowerlevels of cash generated from operations in 2006 and 2005.  Interest expense****of $0.7 million in 2006, $0.7 million in 2005 and $0.6 million in 2004 wasfrom interest costs associated with capital leases.  Other income (expense)****was$15,000 in 2006, $(43,000) in 2005 and $(35,000) in 2004. 

Our tax expense (benefit) from discontinuedoperations was $0 in 2006, $(1.8) million in 2005, and $1.8 million in 2004.  Theeffective income tax expense or benefit for 2006, 2005 and 2004 reflectmanagement's current estimate of the distribution of earnings among thestatutory jurisdictions in which we operate and the valuation of certain taxcredits and net operating losses in the U.S. and U.K. for those tax years (eachending December 31).  The tax rate in 2004 results from taxes accrued in theU.K.  The tax benefit recorded in 2005 reflects the value of R&D taxcredits claimed in the U.K. for 2002 through 2005 that we were not able torecord until it became "more likely than not" that the credits would beallowed.  These credits effectively offset the prior years' taxes due in the U.K. resulting in net deferred tax assets.  These excess deferred tax assets are offset bya valuation allowance.  

We financed equipment and fixtures acquisitionsat our chemistry laboratory through capital leases of $2.0 million and $3.7million in 2005 and 2004, respectively.  In 2005, new equipment of $59,000 wasacquired through capital lease financing.  The balance of 2005 representedsale-leaseback transactions involving previously acquired equipment.  In 2006,we refinanced $3.8 million of equipment that had either been unencumbered orpreviously financed through capital leases that had matured.

**Recent Accounting Pronouncements**

** **

The shareholders of Tripos, Inc. approved a planof dissolution and liquidation at a special meeting on March 15, 2007.  As aresult of the pending liquidation of the Company and adoption of theliquidation basis of accounting as of March 15, 2007, only accountingpronouncements that will impact the Company prospectively are presented.

In June 2006, the Financial Accounting StandardsBoard ("FASB") issued FASB Interpretation No. 48, "Accounting for Uncertaintyin Income Taxes-an interpretation of FASB Statement No. 109."  ThisInterpretation prescribes a recognition threshold and measurement attribute forthe financial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return.  This Interpretation also providesguidance on de-recognition, classification, interest and penalties, accountingin interim periods, disclosure, and transition.  The Interpretation iseffective for fiscal years beginning after December 15, 2006.  We are currentlyevaluating the requirements of this Interpretation, but do not expect that theadoption will have a material effect on our financial statements or taxreturns.  

**Foreign Currency Translations**

Our foreign operations transact the majority oftheir business in their respective local currencies and are generally notexposed to material foreign currency gains or losses.  Under certaincircumstances, selected contracts may expose Tripos to substantial foreign exchangerisk, positive or negative.  Overall, due to the relative stability of thecurrency of the countries in which we operate and the level of investment ineach country, our current intent is to retain assets within our foreignoperations to fund those operations.

**Disclosuresrequired under the Sarbanes-Oxley Act of 2002**

** **

On July 30, 2002 President Bush signed into lawthe Sarbanes-Oxley Act of 2002 (the "Act").  Certain provisions ofthe Act are currently applicable to Tripos, but many other provisions do notbecome applicable until future dates.  Tripos continues to review the stepsthat need to be taken to assure compliance with the Act and remain current withrelated requirements of the SEC and NASDAQ.

Section 401 of the Act requirescompanies to disclose all material off-balance sheet transactions, arrangements,obligations and other relationships.  For the periods ending December 31,2006 and 2005, Tripos had no off-balance

|  19 |
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**ITEM 7.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)**

sheet transactions or arrangements other thanordinary operating leases that are further discussed in Note 7 of Tripos'consolidated financial statements contained in this Form 10-K

The table that follows summarizes existing contractualobligations by type:

| (000's omitted)                                               | **Payments due by period  Note**(b) |
|---------------------------------------------------------------|-------------------------------------|
| Contractual obligations                                       | Total                               | Up to 1 year | 1-3 years | 3-5 years | 5+ years |
| Bank debt:                                                    |                                     |  |  |  |  |
|      Line of credit   Note (a)  | $3,566                              | $3,566 | $ -- | $ -- | $ -- |
|      Mortgage loan   Note (a)   | 3,552                               | 3,552 | -- | -- | -- |
| Subordinated debt  Note (a)                              | 3,263                               | 3,263 | -- | -- | -- |
| Capital lease obligations                                     | 185                                 | 185 | -- | -- | -- |
| Operating leases                                              | 1,906                               | 579 | 677 | 612 | 38 |
| Redeemable  convertible preferred stock   & dividends (c) | 6,274                               | 6,274 | -- | -- | -- |
| Purchase obligations                                          | --                                  | -- | -- | -- | -- |
| Total                                                         | $18,746                             | $17,419 | $677 | $612 | $38 |

Note (a) Amounts were repaid in full on March20, 2007 from the proceeds of the DI asset sale to Vector Capital.

Note (b) Interest rates on the floating ratelong-term debt (line of credit) are assumed to be constant for the purposes ofthis table.  For this table, we have assumed that $3,500,000 of the revolvingcredit facility is outstanding through March 21, 2007 and that would generatean interest payable of $66,000 at a constant rate of 8.5%.  For the mortgageloan we have assumed an interest rate of 8.4% until maturity in March 2007. The subordinated debt represents principal payments, early termination fee andinterest at a fixed rate of 11.4% up to the payoff date of March 21, 2007. 

Note (c) The convertible preferred stock andremaining dividends are payable prior to any distribution to commonshareholders.

Periodic reports on Form 10-Q, Form 10-K andother filings with the Securities and Exchange Commission ("SEC") onForm 8-K and S-8, can be found on the Tripos web site at www.tripos.comunder the heading Investor Relations - SEC Filings.

**ITEM 7A. QUANTITATIVEAND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS**

Our exposure to marketrisks is limited to foreign exchange variances and fluctuations in interestrates.  During 2004, 2005 and 2006, the Company did experience a significantimpact from foreign exchange.  For example, the costs to perform the customdesign and synthesis contract with Pfizer were incurred in British poundssterling while we were compensated in U.S. dollars for the majority of thework.  As a result, our gross profit was adversely affected by the decline inthe U.S. dollar against the pound in 2004 and 2005.  Part of this effect wasoffset through foreign currency forward contracts whose mark-to-market gainswere recorded in "Other Income".

Our foreign exchangerisk is presently limited to currencies that historically have exhibited relativelyminor fluctuations although from 2004 through 2006, these currencies have shownmore significant variation.  Assets outside the United States subject tocurrency fluctuation are located in England, Germany and France.  Our investments in foreign subsidiaries with a functional currency other than the U.S.dollar are not hedged.  The assets in foreign subsidiaries most susceptible to exchangerate variances were as follows:  US dollar/UK pound balances 2006 $16.8million, 2005 $13.0 million and US dollar/Euro balances 2006 $1.2 million, 2005$3.0 million, respectively.  The potential reduction in fair value resultingfrom a hypothetical 10% adverse change in US dollar/UK pound currency exchange rateswould be approximately $1.7 million and $1.3 million at December 31, 2006 and 2005,respectively, while the same 10% adverse movement in the US dollar/Euro rateswould be approximately, $120,000 and $300,000 for 2006 and 2005 year-ends,respectively.  Any loss in fair value of permanently invested funds would bereflected in Other Comprehensive Income and would not impact our net income. 

Our interest rate riskis attributable to borrowings under the line-of-credit and mortgage loan.  Wemonitor our exposure to floating interest rate risk on line-of-creditborrowings along with the outstanding balance on the mortgage loan and may, attimes, endeavor to mitigate this risk through the use of appropriate hedginginstruments.

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**ITEM8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

| **Consolidated Balance  Sheets**                                                                                                   | ** **              | ** ** | ** **          |
|------------------------------------------------------------------------------------------------------------------------------------|-------------------------|------------|---------------------|
| *In thousands (except per  share amounts)*                                                                                         | **Dec 31, 2006 **  |            | Dec 31, 2005   |
| **Assets:**                                                                                                                        |                         |            |                     |  |  |
| Current assets:                                                                                                                    |                         |            |                     |  |
|    Cash and  cash equivalents                                                                                       | **$ 2,157 **  | ** ** | $ 4,393   |
|    Restricted Cash                                                                                                       | **14 **            | ** ** | --        |
|    Accounts  receivable, less allowance for doubtful accounts                                                       | ** **              |            |                     |
|         of  $**192** in 2006 and $190 in 2005                                              | **8,573 **         | ** ** | 9,284          |
|    Prepaid  expenses                                                                                                | **2,423 **         | ** ** | 4,262          |
|    Current assets  of discontinued operations                                                                       | **5,121 **         | ** ** | 9,062          |
|         Total  current assets                                                              | **18,288 **        | ** ** | 27,001         |
| Property and equipment,  less accumulated depreciation                                                                             | **5,084 **         | ** ** | 5,843          |
| Capitalized development  costs, net of accumulated amortization                                                                    | ** **              |            |                     |
|         of  **$3,366** in 2006 and $2,515 in 2005                                          | **2,237 **         | ** ** | 2,291          |
| Goodwill                                                                                                                           | **4,308 **         | ** ** | 4,308          |
| Intangible assets, less  accumulated amortization                                                                                  | **3,068 **         | ** ** | 3,554          |
| Investments recorded at  cost                                                                                                      | **-- **            | ** ** | 1,695          |
| Deferred income taxes                                                                                                              | **171 **           | ** ** | 231            |
| Other, net of accumulated  amortization of $164                                                                                    | **464 **           | ** ** | --        |
| Long-term assets of  discontinued operations                                                                                       | **54 **            | ** ** | 21,893         |
|         Total  assets                                                                      | **$ 33,674 ** | ** ** | $ 66,816  |
| * *                                                                                                                           |                         |            | ** **          |  |  |
| **Liabilities and  shareholders' equity:**                                                                                         | ** **              |            |                     |
| Current liabilities:                                                                                                               |                         | ** ** |                     |  |
|    Current  portion of long-term debt                                                                               | **$ 9,845 **  |            | $ 5,241   |
|    Current  portion of capital leases                                                                               | **181 **           |            | 407            |
|    Accounts  payable                                                                                                | **1,383 **         |            | 775            |
|    Accrued  expenses                                                                                                | **6,281 **         |            | 3,496          |
|    Deferred  income taxes                                                                                           | **22 **            |            | --             |
|    Deferred  revenue                                                                                                | **14,740 **        |            | 14,995         |
|    Current  liabilities of discontinued operations                                                                  | **4,169 **         |            | 5,155          |
|         Total  current liabilities                                                         | **36,621 **        |            | 30,069         |
|                                                                                                                                    |                         |            | ** **          |  |  |
|    Long-term  portion of capital leases                                                                             | **-- **            |            | 60             |
|    Long-term  debt                                                                                                  | **-- **            |            | 5,891          |
|    Common  stock warrants                                                                                           | **107 **           |            | --        |
|    Long-term  liabilities of discontinued operations                                                                | **2,060 **         |            | 1,283          |
| Total liabilities                                                                                                                  | **38,788 **        |            | 37,303         |
|                                                                                                                                    | ** **              |            |                     |
| Redeemable convertible  preferred stock, $0.01 par value, authorized 1,833 shares, issued 1,833  shares in 2006, no shares in 2005 | **3,932 **         |            | --        |
|                                                                                                                                    |                         |            | ** **          |  |  |
| Shareholders' equity                                                                                                               |                         | ** ** |                     |  |
|    Common  stock, $.01 par value; authorized 20,000 shares; issued                                                  | ** **              |            |                     |
|         and  outstanding **10,393** shares in 2006 and 10,190 shares in 2005               | **104 **           |            | 102            |
|    Additional  paid-in capital                                                                                      | **42,560 **        |            | 41,846         |
|    Retained  earnings (deficit)                                                                                     | **(50,051)**            |            | (12,377)            |
|    Other  comprehensive income (deficit)                                                                            | **(1,659)**             |            | (58)                |
|         Total  shareholders' equity                                                        | **(9,046)**             |            | 29,513         |
|         Total  liabilities and shareholders' equity                                        | **$ 33,674 ** |            | $66,816        |
|                                                                                                                                    |                         |            | ** **          |  |  |
| *See notes to consolidated  financial statements*                                                                                  |                         |            |                     |

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** **

| **Consolidated Statements  of Operations**                                                                                                        |
|---------------------------------------------------------------------------------------------------------------------------------------------------|
| *In thousands, except per  share amounts*                                                                                                         | ** ** |  | ** ** |
|                                                                                                                                                   | **Year ended** | Year ended | Year ended |
|                                                                                                                                                   | **Dec 31, 2006** | Dec 31, 2005 | Dec 31, 2004 |
| **Net sales:**                                                                                                                                    |  |  |  |
|     Discovery  informatics licenses & support                                                                             | **$23,395 ** | $ 24,857  | $ 24,639  |
|     Discovery  informatics services                                                                                           | **3,957 ** | 3,076  | 4,005  |
|     Hardware                                                                                                                  | **32 ** | 48  | 131  |
|         Total  net sales                                                                                  | **27,384 ** | 27,981  | 28,775  |
| **Cost of sales:**                                                                                                                                | ** ** |  | ** ** |
|     Discovery  informatics licenses & support                                                                             | **5,439 ** | 6,220  | 5,280  |
|     Discovery  informatics services                                                                                           | **4,064 ** | 2,320  | 2,911  |
|     Hardware                                                                                                                  | **27 ** | 41  | 106  |
|         Total  cost of sales                                                                              | **9,530 ** | 8,581  | 8,297  |
| Gross profit                                                                                                                                      | **17,854 ** | 19,400  | 20,478  |
| **Operating expenses:**                                                                                                                           | ** ** |  |  |
|     Sales  and marketing                                                                                                      | **9,728 ** | 9,435  | 11,343  |
|     Research  and development                                                                                                 | **7,034 ** | 7,712  | 7,678  |
|     General  and administrative                                                                                               | **5,501 ** | 5,322  | 6,024  |
|     Restructuring  charge                                                                                                     | **120 ** | --   | --   |
|     Impairment charge                                                                                                              | **100 ** | --    | --    |
|         Total  operating expenses                                                                         | **22,483 ** | 22,469  | 25,045  |
| Loss from operations                                                                                                                              | **(4,629)** | (3,069) | (4,567) |
| Interest income                                                                                                                                   | **88 ** | 86  | 63  |
| Interest expense                                                                                                                                  | **(1,527)** | (999) | (475) |
| Gain (loss) on sale of  marketable securities, net                                                                                                | **(52)** | 545  | 144  |
| Net loss on unconsolidated  investments                                                                                                           | **(746)** | (204) | (58) |
| Mark-to-market of warrants                                                                                                                        | **933 ** | --  | --  |
| Other income (expense), net                                                                                                                       | **1,330 ** | (1,108) |  778  |
| Loss before income taxes                                                                                                                          | **(4,603)** | (4,749) | (4,115) |
| Income tax expense  (benefit)                                                                                                                     | **341** | (270) | 210  |
| Net loss from continuing  operations                                                                                                              | **(4,944)** | (4,479) | (4,325) |
| Preferred dividends                                                                                                                               | **919 ** | --  | --  |
| Net loss from continuing  operations  allocable to common shareholders                                                                            | **(5,863)** | (4,479) | (4,325) |
| Income (loss) from discontinued  operations, net of taxes	(benefits)  of $0, $(1,800) and $1,800, respectively,	allocable to  common shareholders | **(32,730)** | 191  | 4,557  |
| Net income (loss) allocable to common shareholders                                                                                                | **$ (38,593)** | $ (4,288) | $ 232  |
|                                                                                                                                                   |  | ** ** |  |  |
| Basic & diluted loss  from continuing operations per share                                                                                    | **$ (0.57)** | $ (0.44) | $ (0.47) |
| Basic & diluted  income  (loss) from discontinued   operations per share                                                                 | **$ (3.20)** | $ 0.02  | $ 0.50  |
| Basic & diluted income  (loss) allocable to common   shareholders per share                                                                   | **$ (3.77)** | $ (0.42) | $0.03  |
| Basic & diluted weighted  average number of shares                                                                                            | **10,237 ** | 10,096  | 9,206  |
|                                                                                                                                                   |
| *See notes to consolidated  financial statements*                                                                                                 |
|                                                                                                                                                   |  |  |  |  |

| 22 |
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----

** **

| **Consolidated Statements of Cash Flows**                                                                     |                     |                      |
|---------------------------------------------------------------------------------------------------------------|---------------------|----------------------|
| *In thousands*                                                                                                | **Year ended**      | Year ended           | Year ended |
| * *                                                                                                      | **Dec 31, 2006**    | Dec 31, 2005         | Dec 31, 2004 |
| **Operating  activities:**                                                                                    | * *            | * *             | * * |
| Net  income (loss)                                                                                            | **$ (37,674)** | $ (4,288)  | $ 232  |
| Adjustments  to reconcile net income (loss)                                                                   | ** **          |                      |  |
| to  net cash provided by (used in) operating activities:                                                      | ** **          |                      |  |
| Net  loss (income) from discontinued operations                                                               | **32,730 **    | (191)           | (4,557)  |
|     Depreciation  of property & equipment                                             | **1,127 **     | 1,201           | 604  |
|     Amortization  of capitalized development costs & other intangible assets          | **1,337 **     | 2,140           | 1,137  |
|     Amortization  of debt discount                                                        | **243 **       | 55              | --   |
|     Amortization  of deferred issuance costs                                              | **164 **       | --         | --   |
|     Gain  from the sale of marketable securities & other investments                  | **798 **       | (545)                | (144) |
|     Write-down  of impaired investment                                                    | **--  **  | 204             | 58  |
|     Non-cash  impairment & restructuring charges                                      | **100 **       | --         | --   |
|     Loss  (gain) on retirement of assets                                                  | **30 **        | 25              | 7  |
|     Deferred  income taxes                                                                | **82 **        | 5               | 236  |
|      Gain on revaluation of common stock warrants                                              | **(933)**           | --         | --   |
|      Stock-based compensation expense                                                          | **289 **       | --         | --   |
| Change  in operating assets & liabilities 	(excluding acquired business):                                 | ** **          |                      |  |
|      Restricted Cash                                                                           | **(14)**            | --         | --   |
|     Accounts  receivable                                                                  | **1,814 **     | (679)                | 2,760  |
|     Prepaid  expenses & other current assets                                          | **3,791 **     | (167)                | (502) |
|     Accounts  payable & accrued expenses                                              | **(308)**           | (10)                 | (1,623) |
|     Deferred  revenue                                                                     | **(2,080)**         | (511)                | 1,701  |
| Net  cash provided by (used in) discontinued operations operating activities                                  | **(7,198)**         | 7,533           | 12,693  |
| Net  cash provided by (used in) operating activities                                                          | **(5,702)**         | 4,772           | 12,602  |
| **Investing  activities:**                                                                                    |                     | ** **           |  |  |
|     Purchases  of property & equipment                                                | **(335)**           | (418)                | (213) |
|     Proceeds  from the sale of equipment                                                  | **2 **         | 10              | --   |
|     Capitalized  development costs                                                        | **(797)**           | (1,715)              | (639) |
|     Proceeds  from the sale of marketable securities                                      | **949 **       | 731             | 196  |
|     Acquisition  of business, net of cash received                                        | **--  **  | (4,753)              | --   |
|      Proceeds from distribution from investment in unconsolidated  affiliates   | **36 **        | --         | --   |
|     Other,  including investments in unconsolidated affiliates                            | **(88)**            | (311)                | (286) |
| Net  cash provided by (used in) discontinued operations investing activities                                  | **4,044 **     | (889)                | 832  |
| Net  cash provided by (used in) investing activities                                                          | **3,811 **     | (7,325)              | (110)  |
| **Financing  activities:**                                                                                    |                     | ** **           |  |  |
|     Proceeds  from stock issuance pursuant to stock purchase & option plans      | **276 **       | 331             | 941  |
|      Proceeds from the issuance of preferred stock                                             | **4,851 **     | --         | --   |
|      Payments of cash dividends on preferred stock                                             | **(382)**           | --         | --   |
|     Borrowings  under revolving line of credit                                            | **8,700 **     | 18,130          | 8,370  |
|     Proceeds  from issuance of long-term debt & capital leases                        | --             | 3,689           | --  |
|     Payments  on long-term debt & capital lease obligations                           | **(11,129)**        | (14,419)             | (15,339) |
| Net  cash used in discontinued operations financing activities                                                | **(2,932)**         | (2,665)              | (3,612) |
| Net  cash provided by (used in) financing activities                                                          | **(616) **     | 5,066           | (9,640) |
| Effect  of foreign exchange rate changes on cash & cash equivalents                                       | **(972)**           | (443)                | (1,626) |
|                                                                                                               | ** **          |                      |  |

| 23 |
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----

| **Consolidated Statements of Cash Flows (continued)**                      | ** **             |                    |                    |
|----------------------------------------------------------------------------|------------------------|--------------------|--------------------|
|                                                                            | **Year ended**         | Year ended         | Year ended         |
|                                                                            | **Dec 31, 2006**       | Dec 31, 2005       | Dec 31, 2004       |
| Total  increase (decrease) in cash & cash equivalents                  | **(3,479)**            | 2,070         | 1,226         |
|                                                                            | ** **             |                    |                    |
| Cash  & cash equivalents at beginning of year- continuing operations   | **4,393 **        | 3,444         | 2,258         |
| Cash  & cash equivalents at beginning of year- discontinued operations | **1,848 **        | 727           | 687           |
| Total  cash & cash equivalents at beginning of year                    | **6,241 **        | 4,171         | 2,945         |
|                                                                            |                        |                    |                    |  |  |  |
|                                                                            |                        |                    | ** **         |
| Cash & cash equivalents  at end of year- continuing operations         | **2,157 **        | 4,393         |  3,444        |
| Cash & cash equivalents  at end of year- discontinued operations       | **605 **          | 1,848         | 727           |
| Total cash & cash  equivalents at end of year                          | **$ 2,762 ** | $ 6,241  | $ 4,171  |
|                                                                            |                        |                    | ** **         |
| *See notes to consolidated  financial statements*                          |                        |                    |                    |
|                                                                            |                        |                    |                    |  |  |  |

**Supplemental Disclosure of Cash Flow Information**

Information about non-cashinvesting activities not reflected in the Consolidated Statement of Cash Flowsfollows:

| (Amounts in thousands)                                              | **Twelve Months Ended** |
|---------------------------------------------------------------------|-------------------------|
| ** **                                                          | **Dec 31, 2006**        | Dec 31, 2005 | Dec 31, 2004 |
| **Non-cash investing activities**                                   | ** **              |  | ** ** |
| Increase in fair value of marketable securities,  net of tax effect | **$ -- **     | $ 53  | $ 97 |
|                                                                     | ** **              |  |  |
| Purchase of new equipment through capital  lease financing          | **-- **            | 59  | 3,689 |

In January 2005, theCompany acquired Optive Research, Inc. for $4,770 in cash, 600 shares of theCompany's common stock valued at $3,200 and direct costs of the acquisition. The related assets and liabilities at the acquisition date were as follows(amounts in thousands):

|   Cash                              | $ 647    |
|-----------------------------------------------|--------------------|
|   Accounts receivable               | 809           |
|   Prepaids & other              | 30            |
|   Equipment, net                    | 40            |
|   Intangible assets                 | 3,940         |
|   Goodwill                          | 4,308         |
|     Total assets acquired | 9,774         |
|                                               |                    |
|   Accounts payable                  | (422)              |
|   Accrued expenses                  | (97)               |
| **  **Deferred revenue              | (655)              |
|   Common stock issued to sellers    | (3,200)            |
|                                               |                    |
|   Cash paid                         | $ 5,400  |

On May 4, 2006, Tripos completed the sale of 1,833shares of Redeemable Convertible Preferred Stock at a price of $3.00 per shareand issued 550 five-year common stock warrants exercisable at $3.50 per shareto Midwood Capital, a private equity firm, for gross proceeds of $5,500.  Netproceeds from this transaction were $4,851, with placement agent's fee andlegal and other costs incurred by the Company detailed as follows:

|   Gross proceeds              | $ 5,500  |
|-----------------------------------------|--------------------|
|   Investment banker fees      | (403)              |
|   Legal and professional fees | (196)              |
|   Other fees                  | (50)               |
|   Net Proceeds                | $ 4,851  |
|                                         |                    |
| Non-cash warrant value                  | $1,040        |
| Accretion of non-cash dividend expense  | $ 537    |

| 24 |
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----

| ****
**Consolidated Statements  of Shareholders' Equity**                                                                                                 |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|
| In thousands                                                                                                                                              | ** ** |  |  | Additional | Retained | Other | Total |
|                                                                                                                                                           |  |  Common Stock | Paid-in | Earnings | Comprehensive | Shareholders' |
|                                                                                                                                                           |  | Shares | Amount      | Capital | (Deficit) | Income (Loss) | Equity |
| Balance  at Dec 31, 2003                                                                                                                                  | 9,046 | $ 90 | $ 36,457  | $ (8,321) | $ (1,232) | $ 26,994  |
| Stock  issued under stock purchase plan                                                                                                              | 94 | 1 | 484  | --  | --  | 485  |
| Stock  issued under stock option plan                                                                                                                | 214 | 3 | 427  | --  | --  | 430  |
| Stock  issued under director	     compensation  plan                                                                             | 5 | -- |  	26  | --  | --  | 26  |
| Comprehensive  income, net of tax:                                                                                                                        |  |  |  |  | --  |  |
|      Translation  adjustment                                                                                                     | -- | -- | --  | --  | (314) | (314) |
|      Unrealized  gain on securities:                                                                                             |  |  |  |  |  |  |
|         Unrealized  holding gains                                                                                 | -- | -- | --  | --  | 96  | 96  |
|         Less:  reclassification for          gains included in net income | -- | -- | --  | --  | (83) | (83) |
|      Net  income                                                                                                                 | -- | -- | --  | 232  | --  | 232  |
| Total  comprehensive loss                                                                                                                                 |  |  |  |  |  | (69) |
| Balance  at Dec 31, 2004                                                                                                                                  | 9,359 | 94 | 37,394  | (8,089) |  (1,533) | 27,866  |
| Stock  issued under stock purchase plan                                                                                                              | 89 | 1 | 278  | --  | --  | 279  |
| Stock  issued under stock option plan                                                                                                                | 20 | -- | 14  | --  | --  | 14  |
| Stock  issued under director	     compensation  plan                                                                             | 10 | -- | 38  | --  | --  | 38  |
| Stock  issued in acquisition:                                                                                                                             |   |   |   |   |   |   |
|       to Optive shareholders                                                                                                          | 600 | 6 | 3,194  | --  | --  | 3,200  |
|       to new investors                                                                                                                | 112 | 1 | 928  | --  | --  | 929  |
| Comprehensive  income, net of tax:                                                                                                                        |  |  |  |  |   |   |
|      Translation  adjustment                                                                                                     | -- | -- | -- | -- | 1,571

  | 1,571 |
|      Unrealized  gain (loss) on securities:                                                                                      |   |   |   |   |   |   |
|         Less:  reclassification for          Gains included in net income | -- | -- | --  | --  | (96) | (96) |
|      Net  income                                                                                                                 | -- | -- | --  | (4,288) | -- | (4,288) |
| Total  comprehensive loss                                                                                                                                 |   |   |   |   |   | (2,813) |
| Balance  at Dec 31, 2005                                                                                                                                  | 10,190 | $ 102 | $ 41,846 | $ (12,377) | $ (58) | $ 29,513  |
| Stock  issued under stock purchase plan                                                                                                              | **176** | **2** | **235 ** | **-- ** | **-- ** | **237 ** |
| Stock  issued under director       Compensation plan                                                                             | **27** | **--** | **39 ** | **-- ** | **-- ** | **39 ** |
| Seven  Hills Warrants                                                                                                                                     | **--** | **--** | **30 ** | **-- ** | **-- ** | **30 ** |
| Convertible  preferred stock discount                                                                                                                     | **--** | **--** | **1,015 ** | **-- ** | **-- ** | **1,015 ** |
| Preferred  dividends                                                                                                                                      | **--** | **--** | **(919)** | **-- ** | **-- ** | **(919)** |
| Stock  based compensation-        continuing operations                                                                          | **--** | **--** | **289 ** | **-- ** | **-- ** | **289 ** |
| Stock  based compensation-        discontinued operations                                                                        | **--** | **--** | **25 ** | **-- ** | **-- ** | **25 ** |
| Comprehensive  income, net of tax:                                                                                                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|      Translation  adjustment                                                                                                     | **--** | **--** | **-- ** | **-- ** | **(1,601)** | **(1,601)** |
|      Net  loss                                                                                                                   | **--** | **--** | **-- ** | **(37,674)** | **-- ** | **(37,674)** |
| Total  comprehensive loss                                                                                                                                 | ** ** | ** ** | ** ** | ** ** | ** ** | **(39,275)** |
|  

Balance  at Dec 31, 2006                                                                                                                          | ** **

**10,393** | ** **

**$ 104** | ** **

**$ 42,560** | ** **

**$ (50,051)** | ** **

**$ (1,659)** | ** **

**$ (9,046)** |
|                                                                                                                                                           |
|                                                                                                                                                           |  |  |  |  |  |  |  |  |

| 25 |
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**Notes to ConsolidatedFinancial Statements***December31, 2006*

#### In thousands, except per share data

________________________________________________________________________________________________

**1.  Description ofBusiness and Summary of Significant Accounting Policies**

*Descriptionof Business and Company Organization. *Wedeliver chemistry products and services, software products and services alongwith analytical services that advance customers' creativity and productivity inpharmaceutical, biotechnology and related life sciences research enterprisesworldwide.  A substantial portion of our business is conducted withpharmaceutical companies. During 2006, Wyeth Pharmaceuticals accounted for 11% of revenues.  No othercustomer in 2006, 2005 or 2004 accounted for more than 10% of revenues.  

*Basisof Consolidation. *The accompanyingconsolidated financial statements include the accounts of Tripos and its whollyowned subsidiaries.  All significant intercompany accounts and transactions areeliminated in consolidation.  Investments in affiliates, owned more than 20%,but not in excess of 50%, are recorded on the equity method.  Investments inunconsolidated affiliates less than 20% owned are accounted for under the costmethod, except for those investments classified as marketable securities.  

*Cashand Cash Equivalents* are highlyliquid investments with maturities of three months or less from the datepurchased. 

*MarketableSecurities* consist of investments inequity securities of unconsolidated affiliates that are held asavailable-for-sale and foreign currency exchange contracts that do not qualifyfor hedge accounting.  We account for securities that can be sold within thenext 12 months as marketable securities.  Amounts presented are the fair valuesof the investments on the balance sheet date determined using then currentmarket quotes.  Unrealized gains and losses are recorded as increases ordecreases in the assets' value (pre-tax basis) with corresponding entriesreflected in Other Comprehensive Income and Deferred Taxes until the assets aresold.  See Note 8 "Financial Instruments" for a further discussion offoreign currency exchange instruments.  We had no marketable securities atDecember 31, 2006 or 2005.  

*InvestmentsRecorded at Cost* consisted ofinvestments in common stock and limited partnerships that were accounted forunder the cost method as permitted under Accounting Principles Board OpinionNo. 18.  

*AccountsReceivable* includes currentoutstanding invoices billed to customers.  Invoices are typically issued withNet 30-day terms upon shipment of product or upon achievement of billableevents for service-based contracts.  Our bad debt experience from uncollectibleaccounts has historically been immaterial.  As a result, we provide a reservefor bad debts on a specific account basis if and when customer payment problemsarise.

*Capitalization and Valuation of ChemicalCompound Costs.* Initial**costs to develop our LeadQuest compounds (chemical compoundsfor sale for use in drug discovery) are categorized as research and developmentexpense until such time as it is probable that a salable library can besuccessfully produced.  Therefore, costs for design, research, and analyticalprocedures for every library of compounds are expensed as incurred.  Ourresearch chemists review the results of analytical procedures to determine ifthe chemical reactions completed are as expected and the product purity andproduct yields are within acceptable tolerances.  This "validation"process determines whether the chemistry is successful and if a saleableproduct will result.  We capitalize costs to inventory once the validationprocess is completed and successful production is reasonably assured.  If thecore reaction is unsuccessful, the library template is abandoned and no furtherdevelopment takes place.  

Similarly, we capitalize the costs ofLeadDiscovery packages once we achieve validation and are reasonably assured ofthe success of the underlying chemistry.  After this point we capture the costsof labor, chemicals and screening activity into work in process inventory. Should a LeadDiscovery library not reach its full potential as a standaloneoffering, we can utilize the products within discovery research contracts forcustomers or in our LeadQuest compound library.

Inventory amounts shown in the ConsolidatedBalance Sheet are net of an obsolescence reserve.  In calculating the reservefor inventory held for sale, the age and sales trends of each category in theinventory are taken into account to determine the net realizable value.  Anyshortfall between the carrying cost of the inventory and the net realizablevalue is provided for in the reserve.  A portion of the LeadQuest inventory isused in discovery research projects.  This portion of the inventory asset isdepreciated over its 10-year expected useful life.

| 26 |
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----

**1. Description of Business and Summary of Significant Accounting Policies(continued)**

*AccountingEstimates.  *The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates and assumptionsthat affect the reported amounts of assets, liabilities and the disclosure ofcontingent assets and liabilities at the date of the financial statements aswell as the reported amounts of revenue and expenses during the reportingperiod.  Actual results could differ from those estimates.

*Propertyand Equipment*are stated at cost. Depreciation is computed by applying an accelerated method over the estimateduseful lives of the assets, which range from five to ten years for equipmentand furniture, twenty-five to thirty-nine years for buildings, the shorter ofthe useful life of the improvement or the life of the related lease term forleasehold improvements, and three years for purchased software.  We seek to matchthe book useful life of our assets to their expected productive lives.  Assetsdeemed to be impaired or no longer productive, are written down to their netrealizable value.

*Capitalizedinterest. *The interest costassociated with major development and construction projects is capitalized andincluded in the cost of the project or asset.  Capitalization of interestceases when the project is substantially complete.  Capitalized interest for2006, 2005 and 2004 was $0, $0 and $39, respectively.  

*Development Costs*primarily consist of softwaredevelopment costs related to new products that are capitalized after theestablishment of technological feasibility (working model) in accordance withStatement of Financial Accounting Standards ("SFAS") No. 86.  During2006, 2005 and 2004 capitalized costs were $797, $1,715 and $639, respectivelyrelated to development work on our Benchware Notebook in 2006, 2005 and 2004along with Benchware Dock and GALAHAD products in 2005 and 2004.  Amortizationof capitalized software development costs is provided on a product-by-productbasis as the greater of (a) the ratio of current gross revenues for a productto the total current and anticipated future gross revenues or (b) thestraight-line method over the remaining estimated economic life of the product. Currently, we use an estimated economic life of three to five years for allcapitalized software development costs.  We assess the recoverability ofcapitalized software development costs by comparing the remaining unamortizedbalance to the net realizable value of the related product.  Any excess iswritten off.  During the fourth quarter of 2005 and 2004 we wrote down one ofour capitalized products, ChemCore RIO, by $1,313 and $890, respectively, toproperly reflect the current net realizable value of the product based upon thechange in target market customer base.  This software product remains valuableto the company for future projects, but is not currently projected to generaterevenue in the near term.  For 2006, 2005 and 2004, amortization of softwaredeveloped for sale was $851, $270 and $6, respectively.  At times, wecapitalize development costs attributable to internal use software inaccordance with AICPA Statement of Position 98-1 "Accounting for the Costsof Computer Software Developed or Obtained for Internal Use". Amortization of internal use software is over the estimated useful life orthree years, which ever is less.  During 2004 we wrote off the cost andaccumulated amortization for fully amortized capitalized software assets forinternal use in the amount of $544.

*Goodwilland Other Intangible Assets. *Goodwillrepresents the excess of the cost of the net assets acquired in acquisitionsover their fair value.  Beginning in 2002, we have adopted Statement ofAccounting Standard No. 142, "Goodwill and Other Intangible Assets"("FAS 142"), that suspends amortization of goodwill in favor ofannual evaluations of impairment by comparing the fair value of the business towhich the goodwill relates to its carrying value.  If it is determined that thecarrying value exceeds the fair value, we would recognize an impairment loss inearnings at that time.  Other identifiable intangible assets with finite lives,such as patents and software products acquired in an acquisition, are amortizedon a straight-line basis over their estimated lives as follows:  acquiredsoftware 5 to 20 years; non-compete agreements 2 to 4 years; and trademarks andpatents 10 to 17 years.  See Note 10 "Goodwill and Other Intangible Assets" forfurther discussion.  

*Long-Lived  Assets.*   In accordance with Statement of Financial Accounting Standards No. 144,  "Accounting for the Impairment or Disposal of Long-Lived Assets"  ("SFAS 144"), the Company reviews identified intangible and otherlong-lived assets for impairment whenever events or changes in circumstancesindicate that the carrying value of the asset may not be recoverable.  Ifsuch events or changes in circumstances are present, an impairment loss would berecognized if the sum of the expected future net cash flows is less than thecarrying amount of the asset.  As a result of continuing negotiationsregarding the sale of our Discovery Research business, we recorded an impairmentcharge in the fourth quarter of 2006 of $13,212 on equipment and buildingslocated at our Bude, England facility.  At the same time we reduced thecarrying value of our goodwill related to Discovery Research to $0 byrecognizing a further impairment charge of $1,100.  The amount of theseimpairment charges reflect the difference between the carrying value of the DRassets and the net proceeds contemplated in a purchase agreement with ProvidPharmaceuticals.  The charge for the

|  27 |
|----------|

                                                                         

----

**1. Description of Business and Summary of Significant Accounting Policies(continued)**

excess carrying value was allocated among theassets to reduce each to its deemed fair market value.  In the third quarter of2006, we recorded an impairment charge of $3,607 which approximated the lossthat was realized in the fourth quarter of 2006 on the sale of certain excessbuildings and real property at our UK laboratory facility.  These impairmentcharges are included in the 2006 loss from discontinued operations.

During the fourth quarter of 2005, we completedour four-year $90 million file enrichment contract with Pfizer.  At that time,we reviewed the carrying values of our long-lived assets related to ourdiscovery research business in the UK and determined that a temporarylaboratory building was no longer required and thus impaired.  We recorded a restructuringcharge related to this building in the amount of $861, reducing its carrying valueto zero.  This charge is reflected in the 2005 income from discontinuedoperations.

In the fourth quarter of 2006, we recorded animpairment charge of $100 on the carrying value of our building in St. Louis toapproximate the expected net proceeds from its sale.  This charge is shownseparately in the 2006 loss from continuing operations. 

Accordingto paragraph 30 of SFAS 144, we have characterized our Discovery Researchbusiness as held for sale as of December 31, 2006.  Actions taken by the boardof directors meets all of the relevant criteria to qualify this business unitas assets held for sale.  As a result, the Discovery Research business is shownas discontinued operations.  Also in compliance with SFAS 144, since the saleof the Discovery Informatics business required the approval of shareholders,that business unit is shown as continuing operations up until approval by theshareholders in March 2007.

*ForeignCurrency Translation.  *The localforeign currency is the functional currency for each of our foreignoperations.  Assets and liabilities of foreign operations are translated toU.S. dollars at the current exchange rates as of the applicable balance sheetdate.  Revenues and expenses are translated at the average exchange ratesprevailing during the period.  Adjustments resulting from translation arereported as a separate component of shareholders' equity.  Net gains and lossesfrom foreign currency transactions were significant during 2005 and 2004 due tofluctuations in the exchange rate between the U.S. dollar and the Euro andGreat Britain pound.  We hedged a portion of our exposure and recorded thegains and losses from this activity in other income (expense), as they did notqualify for hedge accounting under FAS 133.  

*DerivativeInstruments.  *TheFinancial Accounting Standards Board issued Statement No. 133, "Accountingfor Derivative Instruments and Hedging Activities" ("FAS 133"),which requires us to recognize all derivatives on the balance sheet at fairvalue.  We have entered into derivative contracts, principally currency hedges,to limit the risk of fluctuations in foreign currency exchange rates on thevalue of certain sales transactions.  Additionally, we have previously enteredinterest rate swap contracts that effectively convert portions of our floatingrate debt to a fixed rate and therefore mitigate interest rate risk.  Nointerest rate swaps or foreign currency instruments were outstanding as ofDecember 31, 2006 or 2005.  We do not attempt to speculate on the direction ofcurrency rates nor interest rates.  See Note 8 for a further discussion ofFinancial Instruments.

*Warranty.* We warrant our application softwareproducts to perform in accordance with written user documentation and theagreements negotiated with our customers.  Since we do not customize ourapplications software, warranty costs are insignificant and expensed asincurred.

* *

*IncomeTaxes  *We account for income taxes inaccordance with Statement of Financial Accounting Standards No. 109("FAS109")*, Accounting for Income Taxes*, which prescribes theuse of the**asset and liability method whereby deferred tax assets orliabilities are calculated at the balance sheet date using current tax laws andrates in effect.  Valuation allowances are established when necessary to reducedeferred tax assets when it is more likely than not that a portion or all ofthe deferred tax assets will not be realized.  In accordance with FAS No. 109,income tax expense includes 1) deferred tax expense, which generally representsthe net change in the deferred tax asset or liability balance during the yearplus any change in valuation allowances, and 2) current tax expense, whichrepresents the amount of tax currently payable to or receivable from a taxingauthority.  The primary difference between financial statement income andtaxable income results from the use of different methods of computingdepreciation, capitalized development costs, certain revenue recognition activities,other timing differences and the valuation of net operating loss carry-forwards. Deferred taxes do not reflect temporary differences relating to our investmentin the non-Discovery Research foreign subsidiaries as these amounts have beendeemed to be permanently invested.  Estimating the deferred tax position onthese amounts is not practical.

| 28 |
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----

**1. Description of Business and Summary of Significant Accounting Policies(continued)**

* *

*RevenueRecognition*

**     DiscoveryInformatics Licenses and Support**

** **

We recognize revenues in accordance with theAmerican Institute of Certified Public Accountants (AICPA) Statement ofPosition (SOP) 97-2, "Software Revenue Recognition," as amended. Revenues from software license agreements are recognized when all of thefollowing criteria are met as set forth in paragraph 8 of SOP 97-2: (1)persuasive evidence of an arrangement exists, (2) delivery has occurred, (3)the fee is fixed or determinable, and (4) collectibility is probable.

Our largest sources of software license revenueare from Term and Bundled licenses that are time-based arrangements for one ormultiple software products that are sold together with maintenance and supportfor the term of the license arrangement.  We do not have Vendor SpecificObjective Evidence ("VSOE") to determine fair value of the maintenance andsupport in term arrangements and therefore recognize revenues from thesebundled time-based licenses ratably over the license term, which typicallyrange from 1 to 3 years.

We allocate revenues from perpetual softwarearrangements involving multiple elements to each element based on the relativefair values as determined by the VSOE for each element.  We limit ourassessment of VSOE for each element to the price charged when the same elementis sold separately.  We have analyzed all of the elements included in ourmultiple-element arrangements and determined that we have sufficient VSOE toallocate revenues to maintenance and support, and training.  We sell trainingseparately and have established VSOE on this basis.  VSOE for maintenance andsupport is determined based upon the renewal rates in contracts themselves,which is based on a fixed percentage of the current perpetual license listprice.  Accordingly, assuming all other revenue recognition criteria are met,revenues from perpetual licenses are recognized upon delivery of the softwareusing the residual method in accordance with SOP 98-9, "Modification ofSOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions."

Software maintenance agreements provide for technicalsupport and the right to unspecified enhancements and upgrades on a"when-and-if-available" basis.  Post-contract support revenues onperpetual agreements are recognized ratably over the term of the support period(generally one year), and training and other service revenues are recognized asthe related services are provided.  Any unrecognized portion of amounts paid inadvance for licenses and services is recorded as deferred revenue.

For presentation in the statement of operations,license revenues and PCS are combined as allowed under GAAP due to the amountof revenues obtained from PCS when charged separately being immaterial incomparison to the total of these two sources. 

**     Discovery InformaticsServices**

Discovery Informatics Services (DIS) representcontracts for the development of packaged Tripos software and/or for thedevelopment and delivery of enterprise-wide customized software (such aslaboratory information systems or database integration projects). Technological feasibility exists on these software arrangements as theynormally leverage our existing products or techniques.  These arrangementstypically include installation at the customer's site.  We account for thesearrangements in accordance with SOP 81-1, as required by SOP 97-2 since thecontract to deliver software and installation requires significant production,modification or customization of software.

The percentage of completion method is utilizedin applying the provisions of SOP 81-1.  For contracts where customer approvalof contractually required tasks must occur at each distinct milestone, andwhere amounts billable are indicative of progress-to-completion, we recordrevenues when a milestone has been met and accepted by the customer.  Forcontracts without distinct milestones, we measure progress using thecost-to-cost method (cumulative costs as a percentage of total expected coststo complete), which approximates progress towards completion.  When currentestimates of total contract revenue and contract cost indicate a loss, aprovision for the entire loss on the contract is made in the period that theloss becomes evident.

DIS also includes softwaredevelopment projects that are contractual arrangements with customers for use ofour software developers in an effort to develop a scientific software tool foruse in drug discovery.  Billings may be on a time and materials basis;accordingly, we record the related revenue when the time and costs are incurredat the stated contractual rates.  Other contracts may be accounted forunder milestone or completed contract basis depending on the

|  29 |
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**1. Description of Business and Summary of Significant Accounting Policies(continued)**

negotiated terms.  For these arrangements, costand revenues are deferred until achievement of the milestone or completion ofthe contract. 

** **

**     Discovery ResearchServices**

Discovery research sales include:  (1) sales ofchemical compounds from inventory, (2) sales of compounds with associated exclusiveintellectual property, (3) long-term contracts to design and produce chemicalcompounds to customer specifications, or (4) contracts to perform discoveryresearch activities. 

We recognize revenue from the sale of chemicalcompounds upon shipment of the products, FOB shipping point to the customer. This practice is consistent with the four criteria required for revenuerecognition listed in paragraph 1 of Staff Accounting Bulletin ("SAB") 104issued by the U.S. Securities and Exchange Commission ("SEC").  For chemicalcompound transactions, persuasive evidence of an agreement exists upon thereceipt of a contract outlining the purchase and usage terms of the compounds. A purchase order may also be received as confirmation.  As stated above, revenueis not recognized until the compounds have been shipped to the customer.  Theselling price for compounds is fixed according to the terms of the contract orcustomer's purchase order.  Payment terms for chemical compound transactionsare Net 30 days.  We have experienced very few bad debts arising from theseproduct transactions; as a result, collectibility is reasonably assured.

In accordance with SOP 81-1, sales derived fromlong-term contracts to design and produce chemical compounds to customer specificationsare recorded using the percentage of completion method as the finished goodsare delivered (under the units of delivery method).  The contract costs relatedto delivered compounds are recorded to cost of sales as the compounds aredelivered and revenue is recognized.

Discovery research activities involve leadcompound optimization projects, custom synthesis, and compound design. Thesecontracts generally call for non-refundable contractual fees tied to time andmaterials.  Accordingly, revenues under contracts of this type are recorded ona time and material basis.  When contracts to perform discovery researchactivities require a specific deliverable, the direct and incremental contractcosts are deferred.  Revenue and the contract costs are then recognized upondelivery and acceptance.

An access fee for our LeadDiscovery programs isrecognized upon completion of a materials transfer agreement and shipment ofselected compounds to the customer for screening purposes.  Should the customerdecide to retain exclusive rights to promising compounds in the selection, anadditional fee is required.  Customers may engage Tripos for discovery researchservices to further refine the lead compound for additional fees. 

For presentation in the statement of operations,compound revenues and project revenues are combined as allowed under GAAP dueto the amount of revenues obtained from compounds when charged separately beingimmaterial in comparison to the total of these two sources.

**     Hardware Sales**

Hardware sales are recorded upon delivery.

*Earnings(Loss) Per Common and Dilutive Share.* Basicearnings (loss) per common share is computed using the weighted average numberof common shares outstanding during the year.  Diluted earnings (loss) percommon share is computed using the weighted average number of common shares andpotential dilutive common shares that were outstanding during the period. Potential dilutive common shares may consist of outstanding convertiblepreferred shares, stock options and warrants.  See Note 12 for additionalinformation regarding earnings per share.

* *

*Comprehensive Income.* Financial AccountingStandards Board SFAS No. 130, "Reporting Comprehensive Income"establishes standards for reporting and display of comprehensive income and itscomponents (revenue, gains and losses) in a full set of general purposefinancial statements.  SFAS No. 130 requires that all components ofcomprehensive income, including net income, be reported in a financialstatement that is displayed with the same prominence as other financialstatements.  Comprehensive income is defined as the change in equity during aperiod from transactions and other events and circumstances from non-ownersources.  Net income and other comprehensive income, including foreign currencytranslation adjustments, and unrealized gains and losses on investments, shallbe reported, net of their related tax effect, to arrive at comprehensiveincome. 

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**1.  Description ofBusiness and Summary of Significant Accounting Policies (continued)**

The components ofaccumulated other comprehensive income, net of related tax, at December 31,2006 and December 31, 2005 are as follows:

|                                           | **2006**           | 2005           |
|-------------------------------------------|--------------------|----------------|
| Foreign currency translation adjustments  | **$ (1,659)** | $ (58)    |
| Unrealized gains on marketable securities | **--  ** | --   |
| Accumulated other comprehensive income    | **$ (1,659)** | $ (58)    |

*Reclassifications.* Certain reclassifications have been made to prioryears' balances to conform to the current year presentation.

* *

*Stock-BasedCompensation.* At December 31, 2006,Tripos had the stock-based employee compensation plans described in Note 21.  Priorto January 1, 2006, we accounted for stock option plans under the intrinsicvalue method as permitted under Accounting Principles Board Opinion No. 25("APB 25"), "Accounting for Stock Issued to Employees", andrelated Interpretations.  Under APB 25, generally no compensation expense wasrecognized because the exercise price of the options equaled the fair value ofthe stock at the grant date.

EffectiveJanuary 1, 2006, we adopted the fair value recognition provisions ofStatement of Financial Accounting Standards ("SFAS") No. 123R ("FAS123R"), "Share-Based Payment," using the modified-prospective transitionmethod.  Under this transition method, compensation expense was recognizedbeginning January 1, 2006 and includes (a) compensation expense forall share-based employee compensation arrangements granted prior to, but notyet vested as of January 1, 2006, based on the grant date fair valueestimated in accordance with the original provisions of FAS 123, and(b) compensation expense for all share-based employee compensationarrangements granted subsequent to January 1, 2006, based on the grantdate fair value estimated in accordance with the provisions of FAS 123R.  Resultsfor prior periods have not been restated.  See Note 21 for further discussionof stock-based compensation.

Thefollowing table illustrates the effect on net income and earnings per share in2005 and 2004 if the Company had applied the fair value recognition provisionsof SFAS No. 123, "Accounting for Stock-Based Compensation", tostock-based employee compensation.  Our stock option plans have awards (grants)that vest over a period of four years (pro-rata).  The impact shown belowreflects the proforma expense method of applying SFAS No. 123.  

|                                                                                                                                                                                                                           | 2005           |  | 2004             |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------|--|------------------|
| Net income (loss) allocable  to common shareholders as reported                                                                                                                                                           | $ (4,288) |  | $ 232  |
| Deduct: Total stock-based  employee compensation expense         determined under fair value based method  for all awards,         net of related tax effects | 833       |  | 1,346       |
| Pro forma net income (loss)  allocable to common shareholders                                                                                                                                                             | $ (5,121) |  | $ (1,114)   |
|                                                                                                                                                                                                                           |                |  |                  |
| Pro forma earnings (loss)  per share:                                                                                                                                                                                     |                |  |                  |
|       Basic  and diluted - as reported                                                                                                                                                      | $(0.42)        |  | $0.03       |
|       Basic  and diluted - pro forma                                                                                                                                                        | $(0.51)        |  | $(0.12)          |

*New Accounting Pronouncements.* The shareholders ofTripos, Inc. approved a plan of dissolution and liquidation at a specialmeeting on March 15, 2007.  As a result of the pending liquidation of theCompany and adoption of the liquidation basis of accounting as of March 15,2007, only accounting pronouncements effective as of January 1, 2006 that willimpact the Company prospectively are presented.

In June 2006, the Financial Accounting StandardsBoard ("FASB") issued FASB Interpretation No. 48, "Accounting for Uncertaintyin Income Taxes-an interpretation of FASB Statement No. 109."  ThisInterpretation prescribes a recognition threshold and measurement attribute forthe financial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return.  This Interpretation also providesguidance on de-recognition, classification, interest and penalties, accountingin interim periods, disclosure, and transition.  The Interpretation iseffective for fiscal years beginning after December 15, 2006.  We are currentlyevaluating the requirements of this Interpretation, but do not expect that theadoption will have a material effect on our financial statements or taxreturns.  

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________________________________________________________________________________________________

**2. Benefit Plan**

In 1994, we established adefined contribution 401(k) Plan covering all U.S. employees who are at least21 years of age.  Employees may contribute to the plan up to 50% of theircompensation, which is further limited by law. In addition, employees whoreached the age of 50 during the calendar year 2006 are eligible to make anadditional catch up contribution in the amount of $5,000, subject to incomelimitations.  We match employee contributions for an amount up to 50% of the employee's deferral limited to the first 6% of each employee's compensation. Contributions made by the Company were $330 in 2006, $357 in 2005, and $351 in2004.

________________________________________________________________________________________________

**3. Concentrations of Credit Risk**

Financialinstruments that potentially subject us to concentrations of credit risk haveconsisted principally of investments and trade receivables.  We investavailable cash in bank deposits, investment-grade securities, and short-terminterest-producing investments, including government obligations and othermoney market instruments.  We have adopted credit policies and standards toevaluate the risk associated with our sales and require collateral, such asletters of credit or bank guarantees, whenever deemed necessary.  Ourmanagement believes that any risk of loss is significantly reduced due to thenature of the customers and distributors with which we do business.

________________________________________________________________________________________________

**4.  Accrued Expenses**

Accrued expenses consist ofthe following at the end of each year:

|  |                                         | **2006**    | 2005         |
|--|-----------------------------------------|-------------|--------------|
|  | Payroll related                         | **$ 1,161** | $ 1,041      |
|  | Income taxes payable                    | **278**     | 222          |
|  | Product royalties and  distributor fees | **829**     | 1,515        |
|  | DTI Grant Repayment                     | **3,015**   | **-- ** |
|  | Legal & professional  accruals      | **562**     | 489          |
|  | Local sales and VAT taxes               | **54**      | 61           |
|  | Other                                   | **382**     | 168          |
|  |                                         | **$ 6,281** | $ 3,496      |

________________________________________________________________________________________________

**5.**  **Property and Equipment**

Property and equipment at theend of each year are summarized below:

|  |                                       | **2006 **    | 2005     |
|--|---------------------------------------|-------------------|---------------|
|  | Computer equipment                    | **$ 2,484 ** | $ 3,085  |
|  | Furniture & laboratory  equipment | **2,057 **   | 2,068    |
|  | Purchased software for  internal use  | **2,028 **   | 1,946    |
|  | Land *                                | **1,340 **   | 1,340    |
|  | Leasehold improvements                | **129 **     | 129      |
|  | Buildings *                           | **3,357 **   | 3,409    |
|  |                                       | **11,395 **  | 11,977   |
|  | Less accumulated  depreciation        | **(6,311)**       | (6,134)       |
|  | Net property and equipment            | **5,084 **   | 5,843    |

* TheCompany entered into a contract for the sale of its St. Louis property inFebruary 2007 that has a carrying value of $3,821.  The sale closed on April 12,2007.

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________________________________________________________________________________________________

**6. Other Income, Net**

Other Income, Net consists ofthe following at the end of each year:

|  |                                | **2006**               | 2005           | 2004       |
|--|--------------------------------|------------------------|----------------|------------|
|  | Foreign currency gain  (loss)  | **$ 1,340 ** | $ (1,121) | $ 552 |
|  | Gain (loss) on sale of  assets | **(29)**               | (26)           | 15         |
|  | Miscellaneous                  | **19 **           | 39        | 211        |
|  |                                | **$ 1,330 ** | $ (1,108) | $ 778 |

________________________________________________________________________________________________

**7. Lease Obligations**

Welease certain office facilities and equipment under non-cancelable operatingand capital leases with remaining terms from one to five years.  The equipment isstill actively utilized in our operations, remains on our books and continuesto be depreciated.  Quarterly payments go to reduce the capital leaseliability.  The total accumulated amortization associated with equipment undercapital leases was approximately $608 and $621 at December 31, 2006 and 2005,respectively.  The related amortization expense is included in depreciationexpense.  Rent expense under the operating leases was $757, $659 and $783 in2006, 2005, and 2004, respectively.** **Non-cancelable future minimum leasecommitments as of December 31, 2005 are: 

| Year                                          |  | **Operating Leases** | **Capital Leases** |
|-----------------------------------------------|--|----------------------|--------------------|
| 2007                                          |  | $ 579                | $ 185    |
| 2008                                          |  | 362                  | --       |
| 2009                                          |  | 315                  | --       |
| 2010                                          |  | 306                  | --       |
| 2011                                          |  | 306                  | --       |
| Thereafter                                    |  | 38                   | --       |
| Total payments                                |  | $ 1,906              | 185      |
| Less amount representing  interest            |  |                      | (4)                |
| Non-cancelable future  minimum lease payments |  |                      | $ 181         |

Includesthe current portion of capital lease obligations of $181

________________________________________________________________________________________________

**8. Financial Instruments**

** **

Periodically,we enter into foreign currency hedge transactions to protect us fromunfavorable changes in the exchange rate of currencies on certain customercontracts.  For transactions qualifying as effective hedges, as determinedusing either the dollar offset method or regression methods, we record theseforeign exchange contracts at fair value in our Consolidated Balance Sheet andthe related gains or losses on these contracts are deferred in accumulatedother comprehensive income.  These gains or losses are recognized in income inthe period in which the transactions being hedged are recognized.  To theextent any contract is not considered to be perfectly effective in offsettingthe change in fair value of the hedged transaction, the ineffective portion ofthe contract is immediately recognized in income.

When hedge accounting is discontinued because itis determined that the derivative no longer qualifies as an effective fairvalue hedge, the derivative will continue to be carried in the statement offinancial position at its fair value.  When hedge accounting is discontinuedbecause it is probable that a forecasted transaction will not occur, thederivative will continue to be carried in the Consolidated Balance Sheet at itsfair value, and gains and losses that were accumulated in other comprehensiveincome are recognized immediately in earnings.  In all other situations inwhich hedge accounting is discontinued, the derivative will be carried at itsfair value in the Consolidated Balance Sheet, with changes in its fair valuerecognized in current period earnings.

For transactions that do not qualify as effective hedges,there will be a gain or loss reflected in our Consolidated Statement of Operationsfor the change in currency rates.  Gains and losses on foreign currencyexchange contracts were included in other income (expense) net.  Thecounter-party to these foreign currency hedge contracts was LaSalle N.A.  AtDecember 31, 2006 and 2005 there were no foreign currency future contracts inplace. 

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________________________________________________________________________________________________

**9.Grants**

In2002, Tripos, Inc. and its U.K. subsidiary, Tripos Discovery Research Ltd.("TDR"), were awarded two grants related to the expansion of thechemistry laboratories in Bude, Cornwall.  The U.K.'s Department of Trade andIndustry ("DTI") awarded GBP2,400 based on the creation of jobs inthe region and capital investment.  Additionally, the South West of EnglandRegional Development Agency ("SWERDA") awarded GBP1,300 tied to costs toconstruct the laboratory.  At December 31, 2002, TDR had met all criteria forthe first installment of the DTI grant and was approved to receive a payment ofGBP550 that was recorded in 2002.  Approximately GBP99 of the payment wasattributed to the reduction of expenses while the remainder was treated as areduction in the cost of capital expenditures.  During 2003, TDR achievedmultiple thresholds under the South West of England Regional Development Agencygrant and made claims of GBP1,300 which were recorded as reductions in theamounts of capital expenditures.  In 2004, the second installment of the DTIgrant was approved and a payment was received for GBP990.  Approximately GBP205of the payment was attributed to reduction in expenses while the remainingGBP785 was recorded as a reduction of our capital expenditures.  Beginning latein the fourth quarter of 2005 and multiple times during 2006 TDR conducted aseries of job eliminations.  These job eliminations meant that TDR no longermet the criteria to retain the full value of the DTI grant funding.  As ofDecember 31, 2006, Tripos was obligated to repay the full GBP1,540 grant to theDTI based on the terms of the original grant agreement.  We met with the DTIlate in 2006 and were able to reach agreement in the fourth quarter of 2006 onthe repayment of GBP591 and the forgiveness of the balance of the obligation ifwe were able to sell the TDR to a group that would continue to operate thebusiness.  If we are unable to complete a sale of DR and instead shutdown thebusiness unit we may be required to repay the full GBP1,540 grant to the DTI,however, if we are able to sell the business we will only be obligated to paythe GBP591 in full settlement of the grant obligation.  The accompanyingfinancial statements reflect the full obligation of GBP1,540 as of December 31,2006.  We expect that any purchaser of the DR business would assumeresponsibility for the SWERDA grant agreement.

In early 2005, Tripos was awarded an$850 phase II Small Business Innovation Research (SBIR) grant from the U.S.National Institutes of Health (NIH).  The two-year grant will help fundcreation of a full-scale library design system.  Based on topomer technology,this proprietary system will have the capacity to search more than one milliontimes the number of structures previously possible, providing a richer universeof synthetic chemistries.  Scientists will be able to extend their knowledge ofsimilar molecules, resulting in improved success rates for all stages of drugdiscovery.  This system has the potential to be licensed to drug discoveryresearch operations under the appropriate technology transfer agreements.  Asof December 31, 2006 and 2005, the Company had recorded $408 and $387,respectively, of grant funding as revenue and a corresponding amount as cost ofsales, representing staff time spent on the project. 

________________________________________________________________________________________________

**10. Goodwill and Other Intangible Assets**

At December 31, 2006 and2005, the Company had the following intangible asset balances: 

|                        | **Dec 31, 2006** |                  | Dec 31, 2005 |
|------------------------|------------------|------------------|--------------|
|                        | **Gross**        | ** **       |              | Gross |  |
|                        | **Carrying**     | **Accumulated**  |              | Carrying | Accumulated |
|                        | **Amount**       | **Amortization** |              | Amount | Amortization |
| Acquired software      | **$3,590**       | **$764 **   |              | $3,590 | $382  |
| Non-compete agreements | **350**          | **185 **    |              | 350 | 92  |
| Patents and trademarks | **192**          | **115 **    |              | 192 | 104  |
| Total                  | **$4,132 ** | **$1,064 ** |              | $ 4,132 | $578  |

Amortized intangible assets have the followingweighted average useful lives as of December 31, 2006: acquired software - 14.4years; non-compete agreements - 3.9 years; patents and trademarks - 16.7 years;and intangible assets in total - 13.6 years.  Amortization expense wasapproximately $486, $485, and $10 for the years ended December 31, 2006, 2005,and 2004, respectively.  Estimated annual amortization expense for the next 5years is: 2007 - $476; 2008 - $475; 2009 - $391; 2010- $121 and 2011 - $121.

In accordance with theprovisions of Statement No. 142, "Goodwill and Other Intangible Assets", the Company performed formal impairment tests ofgoodwill in 2006 and 2005 by using a discounted cash flow approach to estimatefair value.  Based on our evaluations, we determined there was no impairment ofthe goodwill related to continuing operations.

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________________________________________________________________________________

**11. Restructuring Charges**

In January 2006, weeliminated nine positions in our Discovery Informatics business unit.  The costsrelated to the DI job reductions of $120 are recorded in the consolidatedstatement of operations in the restructuring charge line item and   were fully paidby December 31, 2006.

________________________________________________________________________________________________

**12. Earnings Per Share**

** **

Thefollowing table sets forth the computation of basic and diluted earnings pershare:

|              |                                                                                                           | **2006**                   | 2005           | 2004         |
|--------------|-----------------------------------------------------------------------------------------------------------|----------------------------|----------------|--------------|
| Numerator:   |                                                                                                           |                            |                |
|              | Numerator  for basic and diluted earnings per share-	-net  income (loss) allocable to common shareholders | ** 	$ (38,593)** | $ (4,288) | $ 232   |
|              | -dividends  accruing to preferred shareholders (Note C)                                                   | **-- **               | --        | --      |
|              | Numerator  for diluted earnings per share                                                                 | **$ (38,593)**        | $ (4,288) | $ 232   |
| Denominator: |                                                                                                           |                            |                |
|              | Denominator  for basic earnings per share-	-weighted  average shares                                      | **10,237 **           | 10,096    | 9,206        |
|              | Effect  of dilutive securities:                                                                           | ** **                 |                |              |
|              |     Warrants  (Note A)                                                                | **-- **               | **--**         | **--**       |
|              |     Employee  stock options  (Note B)                                            | **-- **               | --        | --           |
|              |     Assumed  conversion of Series C preferred shares (Note C)                         | **-- **               | **-- **   | **-- ** |
|              | Denominator  for diluted earnings per share-	-adjusted  weighted average shares and assumed conversions   | **10,237 **           | 10,096    | 9,206        |
|              | Basic  earnings per share                                                                                 | **$(3.77)**                | $(0.42)        | $0.03        |
|              | Diluted  earnings per share                                                                               | **$(3.77)**                | $(0.42)        | $0.03        |

Note A: For the yearsended December 31, 2006 and 2005, the dilutive effect of the 156 outstandingwarrants to purchase shares of common stock issued to Horizon in January 2005has been excluded as the average market price of Tripos common stock was belowthe price of the warrants and therefore the warrants could not be deemed tohave been converted into common stock.  See Note 13. Business Combination for afurther description of the warrants issued to Horizon.  The 550 warrants and 16warrants issued in May 2006 to Midwood Capital and Seven Hills, respectively,have also been excluded for 2006 as the average market price of Tripos commonstock was below the price of the warrants and therefore the warrants could notbe deemed to have been converted into common stock.  See Note 18. Series CPreferred Stock for a discussion of the warrants issued to Midwood and SevenHills.

Note B:  For the yearsended December 31, 2006 and 2005, weighted average shares outstanding did notinclude shares related to the effect of employee stock options as none were exercisableas the exercise price was below the market price of the Company's common stockduring the periods.  Employee stock options were excluded in the calculation ofearnings per share for 2004 they were anti-dilutive with respect to the lossfrom continuing operations. 

Note C:  For the yearended December 31, 2006, weighted average shares outstanding were not adjustedfor the conversion of the Series C Preferred Stock that were issued in May 2006as their inclusion would have been anti-dilutive.  Accordingly, the relatedpreferred dividends were not added back to the numerator for diluted earningsper share.

_______________________________________________________________________________________________

**13. Business Combination**

On January 5, 2005 we acquired Optive Research, Inc.  ("Optive"), a U.S. software company offering discovery informatics  products complementary with our own to the pharmaceutical and biotechnology  industry.  We acquired Optive to maintain access to products presently being  distributed by us and to gain access to new technologies being developed.   The transaction consideration included cash and stock.  Under the terms of  the agreement, we issued 600 shares of our common stock with a value of  $3,200 (a portion of which was restricted and vested evenly on a semi-annual  basis over 2 years) and $4,770 in cash to Optive's former shareholders. The restricted shares were only restricted from trading during the passage ofthe vesting period and were entitled to all other rights attributable to theCompany's common stock and as a result were included in all reporting periods asoutstanding shares for the computation of earnings per share.  The value ofthe shares issued was computed based on the average closing stock price of our 

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```

```

```
 **13.  Business Combination (continued)**
```

```
 
```

```
common stock for a period of 5 days before and after the announcement date.  The cash portion was funded by a group of new investors through the issuance of
```

```
$3,500 of subordinated debt bearing an interest rate of 11.42%, 112 shares of common stock with a negotiated value of $500 and warrants to purchase 156 shares
```

```
of common stock at $4.48 per share.  The warrants are exercisable upon issuance, up to 5 years from the date of grant.  Optive's operating revenues prior to the
```

```
acquisition were approximately $2,400, including nearly $900 of royalty payments made by us to Optive. 
```

```
 
```

```
The purchase price, including direct acquisition costs, has been allocated as follows:
```

| Cash                                              | $ 647  |
|---------------------------------------------------|------------------|
| Accounts receivable                               | 809         |
| Prepaid expenses                                  | 30          |
| Property & equipment,  net                    | 40          |
| Intangible software &  non-compete agreements | 3,940       |
| Goodwill, nondeductible for  tax purposes         | 4,308       |
| Accounts payable                                  | (422)            |
| Accrued expenses                                  | (97)             |
| Deferred revenue                                  | (655)            |

Supplementalproforma information is not presented because the acquisition is not consideredto be material in accordance with SFAS No. 141 *Business Combinations*. Optive's results of operations are included in our consolidated statements ofoperations from the date of acquisition forward.

________________________________________________________________________________________________

**14. Income Taxes**

Thecomponents of income (loss) before income taxes from continuing operations forthe years ended were as follows:

|            |          | **2006**      | 2005  | 2004  |
|------------|----------|---------------|------------|------------|
| ** ** | Domestic | **$ (5,183)** | $ (2,351)  | $ (4,138)  |
|            | Foreign  | **580 ** | (2,398)    | 23    |
|            |          | **$ (4,603)** | $ (4,749)  | $ (4,115)  |

Thecomponents of income tax expense (benefit) for the years ended were as follows:

|                                 |                                        | **2006**                    | 2005          | 2004                    |
|---------------------------------|----------------------------------------|-----------------------------|---------------|-------------------------|
| Current tax expense  (benefit)  |                                        |                             |               |                         |
|                                 | Federal                                |  **$  404 ** |  $ (707) |  $  169  |
|                                 | State and local                        | **(180)**                   | 2        | (116)                   |
|                                 | Foreign                                | **35 **                | 430      | (79)                    |
|                                 |     Total  current | **259 **               | (275)         | (26)                    |
| Deferred tax expense  (benefit) |                                        | **82 **                | 5        | 236                |
|                                 | Total provision                        | **$ 341 **             | $ (270)       | $ 210              |
|                                 |                                        |                             |               |                         |  |

The reconciliation of the effective income tax rateand the U.S. federal income tax rate is as follows:

|  |                                                      | **2006**           |       | 2005           |   | 2004        |   |
|--|------------------------------------------------------|--------------------|-------|----------------|---|-------------|---|
|  | Tax at U.S. federal statutory rate                   | **34.0 **     | **%** | 34.0      | % | 34.0   | % |
|  | Effect of foreign  operations (net of foreign taxes) | **(0.8)**          |       | (9.0)          |   | 1.9    |   |
|  | Foreign withholding tax                              | ** -- ** |       |  --  |   | (1.2)       |   |
|  | State taxes, net of federal  benefit                 | **3.9 **      |       | --        |   | 2.8    |   |
|  | R&D tax credits                                  | ** -- ** |       | 2.1       |   | 0.9         |   |
|  | Valuation allowance                                  | **(41.9)**         |       | (2.4)          |   | (34.6)      |   |
|  | Permanent differences                                | **(2.6)**          |       | (19.0)         |   |  (8.8) |   |
|  | Effective tax rate                                   | ** (7.4)**    | **%** | 5.7       | % | (5.1)       | % |

| 36 |
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----

**14. Income Taxes (continued)**

Thetax effects of temporary differences that give rise to deferred tax assets andliabilities at the end of each year are summarized as follows: 

|                                                     |                                                                | **2006**             | 2005             |
|-----------------------------------------------------|----------------------------------------------------------------|----------------------|------------------|
| Current deferred income tax  asset (liability):     |                                                                |                      |
|                                                     | Allowance for doubtful  accounts                               | **$ 65 **  | $ 65   |
|                                                     | Vacation accrual                                               | **206 **        |  197   |
|                                                     | Deferred revenue                                               | **101 **        | 382         |
|                                                     | Other                                                          | **(137)**            | 278         |
|                                                     | Unrealized gain on  marketable securities                      | **-- **         | --          |
|                                                     | Valuation allowance                                            | **(257)**            | (922)            |
|                                                     |                                                                | **$ (22)**      | $ --   |
| Non-current deferred income  tax asset (liability): |                                                                |                      |
|                                                     | Capitalized development  costs                                 | **$ (843)**     | $ (864)     |
|                                                     | Property, equipment and  other long-lived assets               | **(795)**            | (1,089)          |
|                                                     | NOL carryforward                                               | **8,254 **      | 5,590       |
|                                                     | Unrealized loss on  investments in unconsolidated subsidiaries | **-- **         | 296         |
|                                                     | Tax credit carryforward                                        | **1,273 **      | 1,373       |
|                                                     | Valuation allowance                                            | **(7,718)**          | (5,075)          |
|                                                     |                                                                | **$ 171 ** | $ 231  |
|                                                     |                                                                |                      |                  |  |

A valuation allowancehas been recorded on the deferred tax assets due to the uncertainty whether itis more likely than not that such assets will be realized.  In 2005, additionalvaluation allowances were applied to the current year increase in deferred taxassets primarily from losses generated in the United States and United Kingdomoperations.  

There are $613 of taxbenefits from stock option exercises that occurred prior to the adoption ofSFAS 123R with offsetting valuation allowances that upon realization will becredited to additional paid-in-capital.  Under the new American Jobs CreationAct of 2004, the carryforward period for foreign tax credits has been extendedto 10 years.  Therefore $286 of foreign tax credits will expire in 2011 and2012.  R&D credits generated before 1998 have a 15-year carryforward periodand a 20-year period for credits arising after 1997.  Therefore $940 of R&Dcredits will expire between 2011 and 2024.  In addition, $47 of AMT tax creditshave no expiration date.

Income tax payments for 2006, 2005 and 2004 were $55,$25 and****$217, respectively.  Tripos' U.K. subsidiaries had group losscarry forwards at December 31, 2006, with a pre-tax value of approximately $894that have no expiration date.  Additionally, Tripos' U.S. entity had loss carryforwards of $22,000 on a pre-tax basis that expire between 2022 and 2025.  AtDecember 31, 2006, there were no undistributed earnings from our foreignsubsidiaries. 

________________________________________________________________________________________________

**15. Loss Contract**

In March 2004, we announced the completion of asignificant milestone in our collaboration with Schering AG.  Schering acceptedTripos' AUSPYXTM data cartridge for Oracle as the foundation of their EnterpriseChemical Information Management System (ECIMS).  Having successfully completedthis milestone, the two companies were in talks regarding the specificationsand financial arrangements necessary to complete the development and deploymentof ECIMS.  This required a scope change to the then existing contract.  Becausethese discussions were not finalized, Tripos recorded a charge in 2003 for theestimated project costs in excess of the revenues that it expected under thethen current contract terms.  In calculating the amount of the charge to berecorded, Tripos assumed that the project would not continue past delivery androllout of the production system in mid-2004.  This assumption led to acorresponding reduction of approximately $802 in the total revenues availableunder the contract through the expected mid-2004 delivery.  In addition, werecorded a charge of approximately $813 for the estimated project costs inexcess of the revenues expected under the previous contract terms.  Incalculating the amount of the charge to be recorded, Tripos was required toutilize the then existing contract terms, and could not assume that the projectwould continue past delivery and rollout of the production system in mid-2004. Tripos was required to accrue these excess costs so that its year-end financialstatements fairly reflected the project status as of December 31, 2003.  Thenegotiations were completed in mid-2004 and the project progressed tocompletion in 2005.  Under the revised financial terms, we received paymentsequal to our costs to complete the project and therefore reflected no margin.

| 37 |
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________________________________________________________________________________________________

**16. Investment in A.M. Pappas Life Science Ventures II Fund.**

Since 2001, we have investedin the A.M. Pappas Life Science Ventures II fund administered by A.M. Pappas. This fund invested in new and developing companies in the life science sector. Our investment commitment of $2,500 represented approximately 2.0% of the totalcapital of the fund.  From 2001 through November 30, 2006 we had invested $2,163or 87% of our total commitment.  

The fund recorded investment impairments whenidentified, for which we recognized our pro-rata share of such impairments.  In2005 and 2004, the fund's managers determined that certain investments wereimpaired, and we recorded our pro-rata share of the fund's investment impairments,totaling $204 and $58, respectively.  

In 2004 we received a distribution of 33 sharesof NuVasive, Inc. from the fund manager upon NuVasive's initial publicoffering.  The value of these shares, $341 as of December 31, 2004 was recordedas marketable securities.  During 2005, we sold all 33 shares of NuVasive, Inc,realizing a gain of $240.  In July 2005 we received a distribution from thefund in the form of $319 in cash plus shares in Cerexa, Inc. valued at $14.  Asa result of this transaction, we recognized a gain in the amount of $305.  In2006, we recorded gains of $22 related to distributions from the Fund.  Finally,on December 8, 2006 we sold our remaining investment in the fund to anunrelated third party for $810 and recorded a loss on the transaction of $768.  Thissale also relieved us of the remaining $337 capital commitment.

________________________________________________________________________________________________

**17. Investment in Infinity Pharmaceuticals**

** **

During 2005, we received shares of InfinityPharmaceuticals, a private cancer drug discovery and development company,valued at $191 as part of an early termination agreement for a software licensecontract.  The early termination agreement consisted of cash and shares andrepresented the full value of our software license agreement.  Infinity mergedwith Discovery Partners International, Inc., a public company, in 2006.  We soldour shares in the merged entity during the fourth quarter of 2006 and recordeda loss of $52.

________________________________________________________________________________________________

**18. Series C Preferred Stock**

** **

On May 4, 2006, Tripos completed the sale of 1,833shares of Redeemable Convertible Preferred Stock ("Preferred Stock") at a priceof $3.00 per share and issued 550 five-year common stock warrants exercisableat $3.50 per share to Midwood Capital, a private equity firm, for grossproceeds of $5,500.  Net proceeds from this transaction, after the placementagent's fee and estimated legal and other costs incurred by the Company, wereapproximately $4,851.  Proceeds were utilized to reduce the borrowings underthe revolving line of credit and to fund working capital requirements.  Thewarrants to purchase common stock were exercisable upon issuance.  The sharesof Preferred Stock represent approximately 18 percent of Tripos' outstandingcommon stock on an as-converted basis (1 preferred share is convertible into 1share of common stock).  Each outstanding share of Preferred Stock is entitledto voting rights equal to the number of full shares of Common Stock into whichsuch shares are convertible on the date of issuance.  The Preferred Stock alsohas preferential distribution rights in the event of liquidation, dissolutionor winding-up of the Company or a deemed liquidation.  The Preferred Stockbears a dividend at an annual rate of 10.5% and is redeemable in two years atthe option of the holders.  Due to the sale of the assets of the DI businessafter January 26, 2007 under the terms of the preferred offering the dividendswill be accelerated such that the holders of the Preferred Stock will receivedividends in the aggregate amount of $1,155 inclusive of any dividends receivedto date.  This financing strengthened the Company's balance sheet, enhancing itsability to explore strategic alternatives and support current and potentialbusiness initiatives. 

Upon issuance, the fair  value of the warrants was determined based on the Black-Scholes  option-pricing model and recorded on the balance sheet as a liability in the  amount of $1,040.  The warrants were determined to be a liability, as under  Emerging Issues Task Force ("EITF") 00-19, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settle in, a Company's Own Stock", they could not be recorded in equity due to registration rights obligations and cash penalty requirements that were not capped in the event of unsuccessful registration.  The maximum penalty for failure to register or maintain effectiveness of a registration was determined to exceed the spread between the fair value of registered and unregistered share and, as such, cash settlement was assumed for this determination.  The weighted-average assumptions utilized in determining the Black-Scholes values upon issuance were as follows: stock price-$2.96; strike price-$3.50; dividend yield-0%; risk-free rate-5.0%, volatility factor-0.79 and expected life-5 years.  The Company reassesses the fair value of the warrants on a quarterly basis until exercise or expiration and

| 38 |
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----

**18.  Series C Preferred Stock (continued)**

records any resulting gain or loss through "otherincome" in the statement of operations.  The Company evaluated the conversionfeature of the preferred stock under FAS No. 133, "Accounting for DerivativeInstruments and Hedging Activities" and determined that it was clearly andclosely related to the host contract (preferred stock) and was more akin toequity.  The conversion feature therefore was not separated from the hostcontract.  The equity features of the preferred stock are similar to commonstock: for example voting rights, participation in distributions to commonshareholders, the holder retaining a residual interest in the Company, and thepreferred shares not being mandatorily redeemable.  The Company thereforedetermined that the conversion feature should be evaluated under EITF No. 98-5,"Accounting for Convertible Securities with Beneficial Conversion Features orContingently Adjustable Conversion Rations" and EITF No. 00-27, "Application ofIssue No. 98-5 to Certain Convertible Instruments."  After taking into accountthe allocation of the proceeds to the warrants, the Company determined that thePreferred Stock contained a beneficial conversion feature valued at $1,015based upon the intrinsic value of the shares at the closing stock price versusthe value assigned to the preferred stock.  Together, the value assigned to thewarrants and the beneficial conversion feature created a preferred stockdiscount in the amount of $2,055, which is being accreted through preferreddividend expense over a two-year period using the effective interest ratemethodology.

In addition the transaction costs of $629 wererecorded as deferred issuance cost on the balance sheet and are being amortizedto interest expense over a two-year period also using the effective interestrate methodology.  Included in the transaction costs are 16 warrants valued at$29 to purchase common stock issued to the placement agent.  These warrantswere issued with the same terms at the warrants issued to the holders ofPreferred Stock.  Accretion of the preferred stock discount and amortization ofthe deferred issuance cost in 2006 totaled $537 and $164, respectively.  TheCompany adjusted the warrant valuation quarterly in 2006 starting in the secondquarter, which resulted in a reduction of the liability and recording a gainthrough "other income" in the statement of operations.  For the year, thecumulative adjustment to the warrant value as indicated by the Black-Scholes wasa reduction of $933.  The Black-Scholes assumptions utilized at December 31,2006 were the same as the assumptions utilized upon issuance with the followingexceptions: the stock price reduced to $0.68, the risk free rate adjusted to4.70%, the volatility to 0.78, and the expected life reduced to 4.33 years.

Upon issuance, cash in the amount of $388 wasdeposited into a separate account at LaSalle Bank to cover dividends payable upto December 31, 2006.  On June 30, 2006 and September 30, 2006 and December 31,2006, dividends of $94, $144, and $144, respectively, were paid from thisaccount to Midwood Capital.  The remaining balance and accrued interest areshown as "Restricted Cash" on the Consolidated Balance Sheets and are availableto be applied toward the payment of future dividends when due.

_______________________________________________________________________________________________

**19. Long-term Debt**

As of December 31, 2006, we hada credit agreement with LaSalle Bank N.A. for a $3,480 mortgage note for propertywith a book carrying value of $3,821.  The mortgage is due to mature on March21, 2007.  We also had a $6,000 revolving line of credit agreement with LaSalleBank with an outstanding balance of $3,500 on December 31, 2006.  The Bank andthe company entered into amendments to the line of credit facility to extend itsmaturity from January 1, 2007 to March 21, 2007.  Both credit agreements werecollateralized by substantially all of our U.S. assets and stock pledges foreach of the U.S. and U.K. subsidiaries.  We were in violation of a minimum networth covenant as of the period ended September 30, 2006.  As a result, LaSalleinformed us that they would not extend the maturity date of the facility pastthe scheduled date of January 1, 2007.  The Bank subsequently agreed to extendthe maturity to February 28 and finally to March 21, 2007 due to the company'sprogress with the strategic alternatives process.  

The mortgage note under the credit agreement calledfor even quarterly principal payments based on a twenty-year amortizationschedule.  Borrowings under the mortgage were subject to a variable interestrate at LIBOR plus 2.25%.  Under the amended agreement the interest rate willbe LIBOR plus 3.00%.  Interest rates paid on the mortgage averaged 7.7% during2006.  The $6,000 revolving line of credit under the credit agreement requiredquarterly interest-only payments with any remaining borrowings due at the endof the agreement period.  The line of credit carried a commitment fee of 3/8%of the unused portion of the line.  Borrowings under the revolving line ofcredit bore interest at variable rates tied to LIBOR or the bank's prime rate. We averaged $2,785 of outstanding borrowings during 2006.  The weighted averageinterest rate on line of credit borrowings was 8.3% in 2006.

| 39 |
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----

**19. Long-term Debt (continued)**

The company paid the outstanding balance of themortgage loan and the line of credit to LaSalle Bank with the proceeds from thesale of the assets of the Discovery Informatics business to Vector Capital on March20, 2007.

In connection with the Optive acquisition, the Companyissued a subordinated promissory note to Horizon Technology Finance with a facevalue of $3,500 and a stated interest rate of 11.42%.  The original repaymentterms of the promissory note required monthly interest only payments of $33 forthe first 18 months, followed by 30 monthly payments of $135 beginning onAugust 1, 2006.  This payment schedule was subsequently amended with principalpayments suspended until March 1, 2007.  The subordinated promissory notecontained prepayment penalties.  In addition, as part of the financingtransaction, 112 shares of common stock were issued to Horizon and Sand HillCapital at a discounted price of $4.48 per share.  156 warrants to purchase commonstock were issued to Horizon at a negotiated price of $4.48.  Thesetransactions resulted in original issuance debt discounts of $89 related to thecommon stock issued at a discount and $432 related to the warrants, calculatedbased upon relative fair values.   The debt discounts were being amortized tointerest expense over the life of the loan.  The Company paid the outstandingbalance on the subordinated debt plus the early termination fee to Horizon onMarch 20, 2007 from the proceeds of the asset sale to Vector Capital.

Short-termdebt obligations were:

|  |                                                | **December 31, 2006** | December 31, 2005 |
|--|------------------------------------------------|-----------------------|-------------------|
|  | Borrowings outstanding  under Credit Agreement | **$ 3,500 **     | $ 4,400      |
|  | Mortgage note                                  | **3,480 **       | 218          |
|  | Subordinated debt                              | **3,088 **       | 623          |
|  | Debt discount                                  | **(223)**             | --           |
|  |  Short-term debt                          | **$ 9,845 **     | $ 5,241      |

Long-termdebt obligations were:

|  |                            | **December 31, 2006** | December 31, 2005 |
|--|----------------------------|-----------------------|-------------------|
|  | Mortgage note              | **$ -- **   | $ 3,697           |
|  | Subordinated debt          | **-- **          |  3,500  |
|  | Less current maturities    | **-- **          | (841)             |
|  | Subtotal                   | **-- **          | 6,356        |
|  | Debt discount              | **-- **          | (465)             |
|  |  Total long-term debt | **$ -- **   | $ 5,891      |

Scheduled maturities of long-term debt were to be $8,429in 2007, $1,506 in 2008, and $133 in 2009, consisting of subordinated debtmaturities of $1,506 in 2008, and $133 in 2009.  Interest expense incurred, netof capitalized interest, for the years ended December 31, 2006, 2005 and 2004were $1,280, $837, and $265, respectively, while total interest payments,inclusive of capital lease interest, were $1,527, $999, and $475, respectively. As stated above, the amounts owed to LaSalle Bank and Horizon TechnologyFinance were repaid in full on March 20, 2007.

________________________________________________________________________________________________

**20.Segment Information**

TheFinancial Accounting Standards Board issued SFAS No. 131, "SegmentInformation" ("SFAS 131") to amend the requirements for publiccompanies to report financial and descriptive information about theirreportable operating segments in annual financial statements and selectedinformation about operating segments in interim reports issued toshareholders.  It also establishes standards for related disclosures aboutproducts and services, geographic areas, and major customers.  Operatingsegments, as defined in SFAS 131, are components of the enterprise for whichseparate financial information is available and is evaluated regularly by ourmanagement in deciding how to allocate resources and assess performance.  TheCompany operated two reporting segments, Discovery Informatics and DiscoveryResearch.  The Company's Discovery Informatics segment designs, or in-licenses,and sells licenses to software suites that provide computer-aided molecularmodeling and visualization, virtual screening, combinatorial library design,data storage and analysis, and structure-activity relationships to customers inpharmaceutical, biotechnology and related life science fields of research.  TheCompany's Discovery Research segment provides drug discovery services topharmaceutical and biotechnology companies.  This segment has been designatedas held for sale and is now presented as discontinued operations.  As a result,we no longer have multiple operating segment requiring separate presentation.

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**20.Segment Information (continued)**

Our foreign operationshistorically have been conducted principally through our wholly owned foreignsubsidiaries and third-party distributors.  Information regarding operations bygeographic area for 2006, 2005 and 2004 is as follows:

|                 | **United States** | **Canada**      | **Europe**   | **Pacific Rim** | **Total**    |
|-----------------|-------------------|-----------------|--------------|-----------------|--------------|
| 2006 Net sales  | **$ 12,796**      | **$374  ** | **$ 11,910** | **$ 2,304**     | **$ 27,384** |
|                 |                   |                 |              |                 |              |
| 2005 Net  sales | $ 12,028          | $ 328           | $ 12,993     | $ 2,632         | $ 27,981     |
|                 |                   |                 |              |                 |              |
| 2004  Net sales | $ 11,442          | $ 207           | $ 14,390     | $ 2,736         | $ 28,775     |

|                                           | **United States** | **Canada**    | **Europe** | **Pacific Rim** | **Total**    |
|-------------------------------------------|-------------------|---------------|------------|-----------------|--------------|
| **2006**                                  |                   |               |            |                 |              |
| **Property, plant &  equipment, net** | **$ 5,064**       | **$ --** | **$ 20**   | **$ --**   | **$ 5,084**  |
| **Capitalized  development costs, net**   | **2,237**         | **--**        | **--**     | **--**          | **2,237**    |
| **Goodwill,  net**                        | **4,308**         | **--**        | **--**     | **--**          | **4,308**    |
| **Intangible  assets, net**               | **3,068**         | **--**        | **--**     | **--**          | **3,068**    |
| **Long-lived  assets net**                | **14,677**        | **--**        | **20**     | **--**          | **14,697**   |
|                                           |                   |               |            |                 |              |
| 2005                                      |                   |               |            |                 |              |
| Property, plant &  equipment, net     | 5,732             | --            | 111        | --              | 5,843        |
| Capitalized  development costs, net       | 2,291             | --            | --         | --              | 2,291        |
| Goodwill,  net                            | 4,308             | --            | --         | --              | 4,308        |
| Intangible  assets, net                   | 3,554             | --            | --         | --              | 3,554        |
| Long-lived  assets net                    | 15,885            | --            | 111        | --              | 15,996       |
|                                           |                   |               |            |                 |              |
| 2004                                      |                   |               |            |                 |              |
| Property, plant &  equipment, net     | 6,521             | --            | 204        | --              | 6,725        |
| Capitalized  development costs, net       | 2,159             | --            | --         | --              | 2,159        |
| Goodwill,  net                            | --                | --            | --         | --              | --           |
| Intangible  assets, net                   | 90                | --            | --         | --              | 90           |
| Long-lived  assets net                    | $ 8,770      | $ --     | $ 204 | $ --       | $ 8,974 |

Mostof our services are provided on an integrated worldwide basis.  Because of theintegration of U.S. and non-U.S. services, it is not practical to separateprecisely the U.S.-oriented services from services resulting from operationsoutside the United States and performed for customers outside the United States; accordingly, the separation set forth in the preceding table is based uponinternal allocations, which involve certain management judgments.  Net salesand long-lived assets in the preceding table are attributable to the country orterritory in which our subsidiaries or distributors are located.

________________________________________________________________________________________________

**21. Stock-based Compensation Plans**

In2002, we adopted the 2002 Employee Stock Purchase Plan that allows eligibleemployees to purchase stock at the lower of 85% of the fair market value of thestock on the enrollment date or exercise date as defined by the plan.  Pursuantto the plan, employee purchases are limited to 10% of annual compensation.  Theplan originally had 250 shares reserved for issuance.  In 2004 the shareholdersapproved an increase in the reserve of 450 shares.  The plan is in effect forten years unless terminated or amended sooner by the Board of Directors.  AtDecember 31, 2006, 515 shares have been purchased under this plan leaving 185shares available for issuance.  

In1994, we adopted the 1994 Stock Option Plan that is administered by theCompensation Committee and provided for incentive stock options, non-statutorystock options and stock purchase rights to be granted to our employees andconsultants.  Pursuant to the plan, incentive stock options could be exercisedat a price which is not less than the fair value of the stock on the grantdate, and non-statutory stock options and stock purchase rights could beexercised at a price which is determined by the Compensation Committee. Options vested at the rate of 25% on the first anniversary of each grant and1/48th per month over the next three years.  All options granted have 10-yearterms.  The plan, which was amended in 2001 to increase the number of shares ofcommon stock reserved for issuance from 2,560 to 2,960, was in effect for tenyears from the date of inception and expired during 2004.  The outstanding1,081 options granted prior to the expiration of the plan will remainoutstanding until their exercise, expiration or forfeiture.

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----

**21. Stock-based Compensation Plans (continued)**

In 1994, we adopted the 1994 Director Option Plan thatprovided for non-statutory stock options to be granted to non-employeedirectors at the fair market value of the stock at the date of grant.  Optionsvested in 25% increments on the anniversary of date of grant.  The plan, whichwas amended in 2002 to increase the number of shares of common stock reservedfor issuance from 480 to 600, was in effect for ten years from the date ofinception and expired during 2004.  This plan was amended in 2001 to allow fordiscretionary grants of options.  The outstanding 382 options granted prior tothe expiration of the plan will remain outstanding until their exercise,expiration or forfeiture.

The shareholders approved the 1996 DirectorStock Plan in order to change the compensation arrangements for the board ofdirectors from only cash to 50% cash and 50% common stock.  The board receivestheir compensation quarterly with the number of shares issued dependent on theclosing price on the last business day of the calendar quarter.  The fullamount of the quarterly compensation is expensed in each interim period.  Theseunrestricted shares issued to the board are included in the weighted averagenumber of outstanding shares for computing earnings per share. 

In 2005, we adopted the 2005 Equity Incentive Plan("2005 Plan") that is administered by the Compensation Committee("Administrator") and provides for incentive and/or non-statutory stockoptions, stock appreciation rights, restricted stock, restricted stock units,performance shares and units, deferred stock units and dividend equivalents tobe granted to our employees, consultants and directors.  A total of 800 sharesare available for issuance under the 2005 Plan.  In addition, any outstandingoptions under the Company's 1994 Employee Stock Option Plan that subsequentlyexpire unexercised, up to a maximum of 300 shares, may be recaptured issuedunder the 2005 Plan.  Under the 2005 Plan, the Administrator may grantnonqualified stock options and/or incentive stock options and stockappreciation rights at an exercise price set by the Administrator but not lessthan 100% of the fair market value on the date of grant.  Options and rightsissued under the 2005 Plan become exercisable at the times and on the termsestablished by the Administrator.  The Administrator also establishes the timeat which options expire, but the expiration of an incentive stock option andstock appreciation right may not be later than ten years after the grant date(such term to be limited to 5 years in the case of an incentive stock optiongranted to a participant who owns stock possessing more than 10% of the totalcombined voting power of all classes of stock of the Company or any of parentor subsidiary of the Company).  The Administrator will determine the number ofShares of restricted stock granted to any employee, consultant or director and,unless the Administrator determines otherwise, shares of restricted stock willbe held by the Company as escrow agent until any restrictions on the shareshave lapsed.  The Administrator may accelerate the time at which anyrestriction may lapse or be removed.  The Administrator determines the numberof restricted stock units granted to any employee or consultant.  Indetermining whether an award of restricted stock units should be made, and/orthe vesting schedule for any such award, the Administrator may impose whateverconditions to vesting it determines to be appropriate.  The number ofrestricted stock units paid out to the participant will depend on the extent towhich the vesting criteria are met.  The Administrator may set vesting criteriabased upon the achievement of Company-wide, business unit or individual goals,which may include continued employment or service, or any other basisdetermined by the Committee.  Upon satisfying the applicable vesting criteria,the participant shall be entitled to the payout specified in the awardagreement.  Notwithstanding the foregoing, at any time after the grant ofrestricted stock units, the Administrator may reduce or waive any vesting criteriathat must be met to receive a payout.  The Administrator, in its solediscretion and as set forth in the restricted stock unit agreement, may payearned restricted stock units in cash, shares, or a combination thereof.    Deferred stock units shall consist of a restrictedstock award that the Administrator, in its sole discretion, permits to be paidout in installments or on a deferred basis, in accordance with rules andprocedures established by the Administrator.  A dividend equivalent is acredit, payable in cash, awarded at the discretion of the Administrator, to theaccount of a participant in an amount equal to the cash dividends paid on oneshare for each share represented by an award.

For periods prior to  January 1, 2006, pro-forma information regarding net income and earnings per  share is required by SFAS 123 and has been determined as if we had accounted for employee and director stock options under the fair value method of that Statement (see Note 1).  The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rates ranging from 4.9% to 5.0% for 2006, 3.0% to 4.5% for 2005 and 1.46% to 4.43% for 2004; volatility factor of 0.79 for 2006, 0.63 for 2005 and 0.90 for 2004; and a weighted average expected life of the option of 6.3 years for 2006, 6.2 years for 2005 and 5.3 year for 2004.  For the Tripos Employee Stock Purchase Plan, compensation expense was also estimated using a Black-Scholes option pricing model with the following assumptions: risk-free interest rates ranging from 4.4% to5.3% for 2006, 4.15% to 4.41% for 2005 and 1.29% to 4.57% for 2004; volatility factors of 0.61 for 2006, 0.82 for 2005 and 0.90 for 2004; and a weighted average expected life of the option of 6 months.  For all years presented, we used a dividend rate of zero.  The inputs to the Black-Scholes model were derived as follows: interest rates for U.S. Treasury instruments for comparable lives, volatility from the Company's historical common stock trading activity, and the

|  42 |
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----

**21.  Stock-based Compensation Plans (continued)**

weighted-averagelife from exercise behavior for each of three classes of employees (directors,executive officers, and employees).  Forfeiture rates were separately estimatedfor each of these same employee classes from historical data.

Effective January 1, 2006, we adopted thefair value recognition provisions of SFAS No. 123R ("FAS 123R"),"Share-Based Payment," using the modified-prospective transition method.  Underthis transition method, compensation expense was recognized beginningJanuary 1, 2006 and includes (a) compensation expense for allshare-based employee compensation arrangements granted prior to, but not yet vestedas of January 1, 2006, based on the grant date fair value estimated inaccordance with the original provisions of FAS 123, and (b) compensationexpense for all share-based employee compensation arrangements grantedsubsequent to January 1, 2006, based on the grant date fair valueestimated in accordance with the provisions of FAS 123R.  Under themodified-prospective transition method of FAS 123R, results for prior periodsare not restated. 

As a result of adoptingFAS 123R on January 1, 2006, earnings before income taxes and net incomefor the year ended December 31, 2006 were both $314 lower than if we hadcontinued to account for share-based compensation under APB No. 25.  Basicearnings per share for the year ended December 31, 2006 was reduced by$0.03 per share as a result of the adoption of this statement.  The majority ofoptions granted by the Company qualify as Incentive Stock Options (ISO) forwhich no tax benefit is available to be recognized until the options areexercised and sold by the grantee within one year of exercise.  Typically,Non-Qualifying (NQ) options provide a deferred tax benefit to the Company atthe time of grant and normally a tax benefit in the year of exercise.  TheCompany will only realize the tax benefits when and if they result in an actualreduction in taxes payable.

Prior to the adoption of FAS 123R, we presentedtax benefits for which we received deductions resulting from the exercise ofstock options as operating cash flows in the Consolidated Condensed Statementsof Cash Flows.  FAS 123R requires the cash flows from the tax benefitsresulting from tax deductions in excess of the compensation expense recognizedfor those options (excess tax benefits) to be classified as financing cashflows.  There were no exercises of stock options in 2006, therefore no taxbenefits were recorded as financing proceeds in the cash flow statement.  Theeffect of FAS 123R on our consolidated statement of cash flows was to add backthe $314 of non-cash compensation expense to the cash flows from operatingactivities.  

The Black-Scholes optionvaluation model was developed for use in estimating the fair value of tradedoptions which have no vesting restrictions and are fully transferable.  Inaddition, option valuation models require the input of highly subjectiveassumptions including the expected stock price volatility.  Because ouremployee and director stock options have characteristics significantlydifferent from those of traded options and because changes in the subjectiveinput assumptions can materially affect the fair value estimate, inmanagement's opinion, the existing models do not necessarily provide a reliablesingle measure of the fair value of its employee and director stock options.

Additionalinformation relating to the plans is as follows (in thousands, except forearnings per share information):

| **Options Outstanding Summary**                                           |  | **2006**Shares               | Weighted Average Exercise Price |  | **2005**Shares | Weighted Average Exercise Price |  | **2004**Shares | Weighted Average Exercise Price |
|---------------------------------------------------------------------------|--|------------------------------|---------------------------------|--|----------------|---------------------------------|--|----------------|---------------------------------|
| Beginning outstanding                                                     |  | **1,955 **              | **$ 7.23**                      |  | 1,783     | $ 7.81                          |  | 1,835     | $ 7.41                          |
| Granted                                                                   |  | **25 **                 | **2.99**                        |  | 331       | 3.29                            |  | 272       | 5.85                            |
| Exercised                                                                 |  | **-- **                 | **--**                          |  | (33)           | 2.17                            |  | (248)          | 2.58                            |
| Canceled/expired                                                          |  | **(192)**                    | **4.77**                        |  | (126)          | 6.39                            |  | (76)           | 8.31                            |
|                                                                           |  | ** **                   | ** **                      |  |                |                                 |  |                |                                 |
| Ending outstanding                                                        |  | **1,788 **              | **$7.43**                       |  | 1,955     | $ 7.23                          |  | 1,783     | $ 7.81                          |
|                                                                           |  | ** **                   | ** **                      |  |                |                                 |  |                |                                 |
| Exercisable-end of year                                                   |  | **1,515 **              | **$8.00**                       |  | 1,463     | $ 8.09                          |  | 1,315     | $7.81                           |
|                                                                           |  | ** **                   | ** **                      |  |                |                                 |  |                |                                 |
| Weighted average fair value  per share of options granted during the year |  | ** **

**$ 1.87 ** | ** **                      |  | $ 1.71    |                                 |  | $ 4.01    |                                 |

| 43 |
|----|

                                                                         

----

**21.  Stock-based Compensation Plans (continued)**

| **Directors**                   | Shares    | Weighted Average  Exercise Price | Weighted Average  Remaining Contractual Term | Aggregate Intrinsic  Value |
|---------------------------------|-----------|----------------------------------|----------------------------------------------|----------------------------|
| Outstanding,  January 1, 2006   | 417  | $8.64                            |                                              |                            |
| Granted                         | --   | --                               |                                              |                            |
| Exercised                       | --   | --                               |                                              |                            |
| Forfeited                       | --   | --                               |                                              |                            |
| Expired                         | (35)      | $6.57                            |                                              |                            |
| Outstanding,  December 31, 2006 | 382  | $8.81                            | 4.4 years                                    | $0                         |
| Options  Exercisable            | 326  | $9.27                            | 4.0 years                                    | $0                         |

 

| **Officers**                    | Shares    | Weighted Average  Exercise Price | Weighted Average  Remaining Contractual Term | Aggregate Intrinsic  Value |
|---------------------------------|-----------|----------------------------------|----------------------------------------------|----------------------------|
| Outstanding,  January 1, 2006   | 867  | $7.62                            |                                              |                            |
| Granted                         | --   | --                               |                                              |                            |
| Exercised                       | --   | --                               |                                              |                            |
| Forfeited                       | --   | --                               |                                              |                            |
| Expired                         | (64)      | $3.62                            |                                              |                            |
| Outstanding,  December 31, 2006 | 803  | $7.95                            | 3.8 years                                    | $0                         |
| Options  Exercisable            | 708  | $8.48                            | 3.7 years                                    | $0                         |

 

| **Employees**                   | Shares    | Weighted Average  Exercise Price | Weighted Average  Remaining Contractual Term | Aggregate Intrinsic  Value |
|---------------------------------|-----------|----------------------------------|----------------------------------------------|----------------------------|
| Outstanding,  January 1, 2006   | 671  | $5.83                            |                                              |                            |
| Granted                         | 25   | $2.99                            |                                              |                            |
| Exercised                       | --   | --                               |                                              |                            |
| Forfeited                       | (43)      | $3.86                            |                                              |                            |
| Expired                         | (50)      | $5.77                            |                                              |                            |
| Outstanding,  December 31, 2006 | 603  | $5.86                            | 3.8 years                                    | $0                         |
| Options  Exercisable            | 481  | $6.44                            | 3.5 years                                    | $0                         |

 

| December 31, 2006        | Options Outstanding |                                 | Options Exercisable             |
|--------------------------|---------------------|---------------------------------|---------------------------------|
| Range of Exercise Prices | Number Outstanding  | Weighted Average Remaining Life | Weighted Average Exercise Price |  | Number Exercisable | Weighted Average Exercise Price |
| **$2.94-$3.81**          | 352                 | 3.79                            | $ 3.31                          |  | 187 | $ 3.47 |
| **$3.81-$5.37**          | 360                 | 3.60                            | 4.40                            |  | 355 | 4.39 |
| **$5.37-$6.19**          | 371                 | 4.85                            | 5.86                            |  | 287 | 5.90 |
| **$6.19-$11.25**         | 393                 | 2.98                            | 8.41                            |  | 374 | 8.47 |
| **$11.25-$19.70**        | 312                 | 4.70                            | 16.21                           |  | 312 | 16.21 |
| **$2.94-$19.70**         | 1,788               | 3.95                            | $ 7.43                          |  | 1,515 | $ 8.00 |
|                          |                     |                                 |                                 |  |  |  |

Asummary of the status of the Company's Nonvested options as of December 31,2006 and changes during the twelve months then ended is as follows:

| Nonvested Options               |  | Shares    |  |  |
|---------------------------------|--|-----------|--|--|
| Nonvested  at January 1, 2006   |  | 492  |  |  |
| Granted                         |  | 25   |  |  |
| Vested                          |  | (172)     |  |  |
| Forfeited                       |  | (72)      |  |  |
| Nonvested  at December 31, 2006 |  | 273  |  |  |

As of December 31, 2006, there was approximately$147 of total unrecognized compensation expense related to nonvested stockoptions.  This expense is expected to be recognized in 2007, 2008 and 2009 inthe amounts of $130, $16, and $1, respectively.  The total fair value of sharesvested during 2006 was $249 plus the value of the ESPP shares vesting in theamount of $64.

| 44 |
|----|

                                                                         

----

________________________________________________________________________________________________

**22. Contingent Liability**

As discussed in Note 9, for a period of up to 24months after our last draw under the DTI grant program, we were obligated torepay portions or all of the GBP1,540 of grant money received if we eliminatedjobs or exited the property.   During 2006 we reduced headcount by one hundredtwelve positions.  Late in the fourth quarter of 2006, we concluded negotiationswith the DTI for a reduced repayment commitment if we are successful in sellingthe business to a group that would continue its operations.  The DTI agreed to acceptGBP591 as settlement of the amounts owed and would release Tripos, Inc. fromthe remainder of the grant terms.  Similarly, the Company is obligated to repayup to GBP1,300 to the South West England Regional Development Agency (SWERDA) ifit were to cease operations and/or sell the property at a gain prior tomid-2008.  The Company has obtained tentative approval of the SWERDA for thenovation of this obligation to a prospective purchaser of the DiscoveryResearch business.

________________________________________________________________________________________________

**23. Subsequent Events**

```
On March 20, 2007 the Company sold the assets of the Discovery Informatics business to a subsidiary of Vector Capital Corporation for $26,175.  The shareholders
```

```
also approved the plan of liquidation and dissolution of the Company on March 15, 2007 that will culminate in a distribution of any remaining cash to shareholders. 
```

```
Concurrently with the shareholder approval of the plan of liquidation, we changed our basis of accounting from a going-concern basis to a liquidation basis for all
```

```
periods subsequent to March 15, 2007.
```

```
 
```

```
The Company is in negotiations with unrelated parties and a group made up of the management of Tripos Discovery Research Ltd. for the sale of the Discovery
```

```
Research business.  In addition, the Company completed the sale of its St. Louis headquarters building on April 12, 2007.
```

________________________________________________________________________________________________

**24. Legal Proceedings**

*Securities Class Action Litigation*

On or about July 24, 2003, the Company and twoof its executive officers, Dr. John P. McAlister and Mr. B. James Rubin, weresued in federal district court in St. Louis, Missouri on behalf of purchasersof the Company's common stock during the first half of 2002.  The consolidatedclass action complaint alleged that statements made by the Company in pressreleases and other public disclosures contained materially false and misleadinginformation in violation of the federal securities laws.  On or about May 5,2004, plaintiffs filed a second amended complaint on behalf of a purportedclass of purchasers of the Company's common stock between February 9, 2000 andJuly 1, 2002 (the "Class Period").  The second amended complaintgenerally alleged that, during the Class Period, defendants made false ormisleading statements of material fact about the Company's prospects and failedto follow generally accepted accounting principles in violation of the federalsecurities laws.  The second amended complaint also named Ernst & YoungLLP, the Company's former independent registered public accounting firm, as aco-defendant.  In August 2004, the Company and the individual defendants andErnst & Young filed motions to dismiss the second amended complaint.  OnSeptember 30, 2005, the Company was informed that its motion to dismiss wasdenied; however, the motion to dismiss filed by Ernst & Young was granted. 

 

On March 21, 2006, the parties reached a verbalagreement to settle the class action litigation.  The total amount of thesettlement was $3,150 which was paid by our insurers.  The settlement wassubject to court approval after notice and an opportunity to object wasprovided to the putative shareholder class.  On August 4, 2006 the Courtentered an order approving the settlement and dismissing with prejudice allclaims against the defendants. 

   

*Shareholder Derivative Litigation*

On or about February 10, 2006, a shareholderderivative action was filed in the Circuit Court of the County of St. Louis.  The complaint names certain of the Company's officers and directors as defendantsand names the Company as a nominal defendant.  The complaint alleged thatcertain of the Company's officers and directors breached their fiduciary dutiesto the Company by engaging in alleged wrongful conduct including conductcomplained of in the securities class action litigation described above.  

 

On March 21, 2006, the parties reached a verbal agreement to settle this litigation, subject to final documentation and court approval, involving the implementation of certain policies and procedures by the Company and the payment of

|  45 |
|----------|

                                                                         

----

**24.  Legal Proceedings (continued)**

 

attorneys' fees of $200 to plaintiffs' counsel. All fees were paid by our insurers.  On September 8, 2006 the Court grantedpreliminary approval to the parties' settlement subject to a final approvalhearing.  On November 17, 2006, the Court entered an order approving thesettlement.

________________________________________________________________________________________________

| **25.  Selected Quarterly  Financial Data (Unaudited)**                              |
|-------------------------------------------------------------------------------------------|
| The following table presents  unaudited financial data for each quarter of 2006 and 2005: |
|                                                                                           | Note (a) | Note (b) |  | * * | Note (c) | * * |  | * * |
|                                                                                           | 12/31/06 | 9/30/06 | 6/30/06 | 3/31/06 | 12/31/05 | 9/30/05 | 6/30/05 | 3/31/05 |
| Total  net sales                                                                     | 6,698  | 6,052  | 7,990  | 6,644  | 7,256  | 7,355  | 6,429  | 6,941  |
| Cost  of sales                                                                            | 2,627  | 2,413  | 2,532  | 1,958  | 3,712  | 1,658  | 1,462  | 1,749  |
| Gross  profit                                                                             | 4,071  | 3,639  | 5,458  | 4,686  | 3,544  | 5,697  | 4,967  | 5,192  |
| Operating  expenses                                                                       | 5,171  | 5,288  | 5,761  | 6,263  | 5,778  | 5,552  | 5,505  | 5,634  |
| Income  (loss) from  operations                                                      | (1,100) | (1,649) | (303) | (1,577) | (2,234) | 145  | (538) | (442) |
| Net  income (loss) from   continuing operations allocable to common shareholders          | (2,192) | (2,082) | (176) | (1,413) | (3,399) | 790  | (1,266) | (604) |
| Net income (loss) from  discontinued operations allocable to common shareholders          | (23,118) | (5,910) | (1,429) | (2,273) | (1,841) | (630) | 2,077  | 585  |
| Net income (loss) allocable  to common shareholders                                       | $ (25,310) | $ (7,992) | $ (1,605) | $ (3,686) | $ (5,240) | $ 160  | $ 811  | $ (19) |
| Net income (loss) per:                                                                    |  |  |  |  |  |  |  |  |
|       Basic share                                                     | $(2.46) | $(0.78) | $(0.16) | $(0.36) | $(0.52) | $0.02 | $0.08 | ($0.00) |
|      Diluted share                                                    | $(2.46) | $(0.78) | $(0.16) | $(0.36) | $(0.52) | $0.02 | $0.08 | ($0.00) |
|      Basic  shares                                               | 10,285  | 10,276 | 10,194 | 10,190  | 10,117 | 10,114 | 10,091 | 10,060  |
|      Diluted  shares                                             | 10,285  | 10,276 | 10,194 | 10,190  | 10,117 | 10,143 | 10,091 | 10,060  |

Note (a), Fourth quarter 2006 includes an impairmentcharge of $100 in continuing operations to adjust the carrying value of the St.Louis building to its projected sale value and a total charge of $16,717 indiscontinued operations (including $2,405 charged to cost of sales related toinventory) to approximate the anticipated sale proceeds for the business unit(allocated between inventory and property, plant and equipment).  A charge for$3,016 related to the U.K. grant repayment obligation settlement with the DTIwas recorded in discontinued operations while the liability was recorded in continuingoperations due to the parental guarantee.  Also in the fourth quarter was anadjustment to the percentage of completion on the Wyeth informatics project dueto additions to the total projected costs.

Note (b), Third quarter 2006 includes animpairment charge of $3,607 in discontinued operations to reflect the loss onthe sale of excess laboratory facilities.  Continuing operations includes anadjustment in the third quarter to the percentage of completion on the Wyethinformatics project due to additions to the total projected costs.

Note (c), Fourth quarter 2005 cost of salesinclude a charge totaling $1,313 for the write-down of ChemCore RIO capitalizedsoftware asset and an $861 charge in discontinued operations for the write-downof a temporary laboratory building at our Discovery Research business in Bude,England.

________________________________________________________________________________________________

**26. Discontinued Operations**

Our discontinued operations consist of the DiscoveryResearch business unit that is comprised of the assets of our Tripos DiscoveryResearch subsidiary and other assets of the business unit held at othersubsidiaries.  The results of operations consist of revenues, cost of sales,selling, marketing, research and development, and general and administrativecosts incurred by this business unit.  In addition, this business unit incursinterest expense from capital leases that finance certain laboratory equipment.

During 2006, the Board of  Directors of Tripos, Inc. determined that the Discovery Research ("DR")  business unit would be held as immediately available for sale and met the  conditions set forth in paragraph 30 of SFAS No. 144 

| 46 |
|----|

                                                                         

----

**26. Discontinued Operations (continued)**

"Accounting for the Impairment or Disposal ofLong-Lived Assets".  In addition, according to paragraph 42 of the SFAS No. 144,the DR business unit is to be shown as discontinued operations in all publishedfinancial statements.  Concurrently with the decision to hold the DR businessfor sale, the board approved recording an impairment charge to reduce thecarrying value of the unit's assets to approximate the expected net proceedsfrom a sale.

On January 24, 2006 wecompleted a reduction in force for our Discovery Research business based inBude, England which was previously announced on December 19, 2005.  This actioncoincided with the conclusion of the 30-day consultation period with employeesmandated by U.K. law.  We reduced the number of employees by 76 positions tostreamline and refine our DR business and associated cost structure as a resultof our fourth quarter 2005 completion of the four-year $90 million fileenrichment project with Pfizer Inc.  More than half of the employees affectedleft under a voluntary separation plan.  As a result of these actions, werecorded a pre-tax restructuring charge in the first quarter 2006 ofapproximately $807, for one-time termination benefits and outplacement costs.  On August 11, 2006 wecompleted an additional 14-position reduction in force for our DR business,resulting in a pre-tax restructuring charge of $338. We solicited and obtainedvoluntary terminations for all positions affected in exchange for one-timetermination benefits and outplacement costs.  In the fourth quarter of 2006 weperformed a third reduction in force for an additional 27 positions, reducingour headcount in this business segment to 43 positions and recorded a charge of$471.  These actions were necessary in order to further streamline theDiscovery Research unit.   Costs related to Discovery Research are included in the lossfrom discontinued operations.  The costs of $1,617 associated with theserestructurings were paid by December 31, 2006.

**Condensed Consolidated Balance Sheet**

**Discontinued Operations**

(in thousands)

|                                                                           | Dec 31, 2006  | Dec 31, 2005  |
|---------------------------------------------------------------------------|--------------------|--------------------|
| Cash and equivalents                                                      | $ 605         | $ 1,848       |
| Accounts receivable                                                       | 858                | 1,935              |
| Inventory                                                                 | 3,349              | 5,155              |
| Prepaid expenses                                                          | 309                | 124                |
|    Total current assets of  discontinued operations        | 5,121              | 9,062              |
|                                                                           |                    |                    |
| Property and equipment, net of accumulated  depreciation                  | 54                 | 20,946             |
| Goodwill                                                                  | --                 | 947                |
|    Total long-term assets of  discontinued operations      | 54                 | 21,893             |
| Total assets of discontinued operations                                   | $ 5,175       | $ 30,955      |
|                                                                           |                    |                    |
| Current portion of capital leases                                         | 2,507              | 2,334              |
| Accounts payable                                                          | 352                | 444                |
| Accrued expenses                                                          | 543                | 1,474              |
| Deferred revenue                                                          | 767                | 903                |
|    Total current liabilities of  discontinued operations   | 4,169              | 5,155              |
|                                                                           |                    |                    |
| Long-term portion of capital leases                                       | 2,060              | 1,283              |
|    Total long-term liabilities  of discontinued operations | 2,060              | 1,283              |
| Total liabilities of discontinued operations                              | $ 6,229       | $ 6,438       |

| 47 |
|----|

                                                                         

----

**26. Discontinued Operations (continued)**

**Condensed Consolidated Statement of Operation**

**Discontinued Operations**

(in thousands, except for earnings per shareinformation)

|                                                                                    | Year ended         | Year ended          | Year ended          |
|------------------------------------------------------------------------------------|--------------------|---------------------|---------------------|
|                                                                                    | Dec 31, 2006       | Dec 31, 2005        | Dec 31, 2004        |
| Discovery research services revenues                                               | $ 6,551  | $ 27,440  | $ 36,004  |
| Cost of sales                                                                      | 9,890         | 20,761         | 24,455         |
| Gross profit (loss)                                                                | (3,339)            | 6,679          | 11,549         |
|                                                                                    |                    |                     |                     |
| Sales and marketing                                                                | 743           | 1,231          | 1,217          |
| Research and development                                                           | 6,378         | 3,154          | 1,616          |
| General and administrative                                                         | 2,049         | 2,374          | 1,747          |
| Restructuring charge                                                               | 1,616         | 861            | --             |
| Impairment charge                                                                  | 17,919        | --             | --             |
|    Total operating expenses                                         | 28,705        | 7,620          | 4,580          |
|                                                                                    |                    |                     |                     |
| Income (loss) from operations                                                      | (32,044)           | (941)               | 6,969          |
|                                                                                    |                    |                     |                     |
|    Interest income                                                  | 27            | 44             | 64             |
|    Interest expense                                                 | (728)              | (669)               | (641)               |
|    Other income (loss)                                              | 15            | (43)                | (35)                |
| Income (loss) before taxes                                                         | (32,730)           | (1,609)             | 6,357          |
|                                                                                    |                    |                     |                     |
| Income tax expense (benefit)                                                       | --            | (1,800)             | 1,800          |
|                                                                                    |                    |                     |                     |
| Net income (loss) from discontinued operations  allocable   to common shareholders | $ (32,730)    | $ 191     | $ 4,557        |
|                                                                                    |                    |                     |                     |
| Basic  income (loss) from discontinued operations per share                        | $ (3.20)      | $ 0.02    | $ 0.50         |
| Diluted  income (loss) from discontinued operations per share                      | $ (3.20)      | $ 0.02    | $ 0.50         |

| 48 |
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----

**Report of Independent Registered PublicAccounting Firm**

Board of Directors and Stockholders

Tripos, Inc.

St. Louis, Missouri

We have audited theaccompanying consolidated balance sheets of Tripos, Inc. as of December 31,2006 and 2005, and the related consolidated statements of operations,shareholders' equity and cash flows for each of the three years in the periodended December 31, 2006.  We have also audited the schedule listed in Item15(a) 2.  These financial statements and schedule are the responsibility of theCompany's management.  Our responsibility is to express an opinion on thesefinancial statements and schedule based on our audits.

We conducted our auditsin accordance with the standards of the Public Accounting Oversight Board(United States).  Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements and scheduleare free of material misstatement. The Company is not required to have, norwere we engaged to perform, an audit of its internal control over financialreporting.  Our audit included consideration of internal control over financialreporting as a basis for designing audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Company's internal control over financial reporting.Accordingly, we express no such opinion.  An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements and schedule, assessing the accounting principles usedand significant estimates made by management, as well as evaluating the overallpresentation of the financial statements and schedule.  We believe that our auditsprovide a reasonable basis for our opinion.

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Tripos, Inc. at December 31, 2006and 2005, and the results of its operations and its cash flows for each of thethree years in the period ended December 31, 2006, in conformity withaccounting principles generally accepted in the United States of America.  

Also, in our opinion,the schedule presents fairly, in all material respects, the information setforth therein.

As disclosed in Note 1 to the consolidatedfinancial statements, effective January 1, 2006, the Company adopted thefair value method of accounting provisions of Statement of Financial AccountingStandard No. 123 (revised 2004), "Share Based Payment."

As noted in footnote 23,on March 15, 2007, the Company's shareholders approved the Company's plan ofliquidation and dissolution.  Concurrent with the shareholder approval of theplan of liquidation and dissolution, the Company changed its basis ofaccounting from a going concern basis to a liquidation basis for all periodssubsequent to March 15, 2007.

/s/ BDO Seidman, LLP

Chicago, Illinois

April 13, 2007

| 49 |
|----|

                                                                         

----

**ITEM 9.   CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

** **

None.

** **

##### ITEM 9A.   CONTROLS AND PROCEDURES

Thefollowing information is provided in response to Item 307 of Regulation S-K.

Disclosure Controlsand Procedures

The Management of the Company is responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) for Tripos.  We have designed suchdisclosure controls and procedures, or caused such disclosure controls andprocedures to be designed under our supervision, to ensure that materialinformation relating to Tripos, including its consolidated subsidiaries, is reflectedfor the period in which this report is being prepared.  Management of theCompany, including the Chief Executive Officer and the Chief Financial Officer,have evaluated the effectiveness of the Company's internal controls overfinancial reporting for the year end December 31, 2006 and believe them to beeffective.

The following information is provided inresponse to Item 308 of Regulation S-K.  Because the Company is not anaccelerated filed, due to the fact that its public equity float at June 30, 2006was less than $50 million, Item 308(a) and 308(b) are not applicable.

##### Changes in Internal Control over FinancialReporting

There were no other changes in our internalcontrols over financial reporting during the fourth quarter ending December 31,2006 that have materially affected, or are reasonably likely to material affectour internal controls over financial reporting.

** **

** **

**PARTIII**

** **

**ITEM10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT**

To be supplied by amendment by April 30, 2007.

** **

**ITEM11.   EXECUTIVE COMPENSATION**

To be supplied by amendment by April 30, 2007.

** **

**ITEM12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT**

To be supplied by amendment by April 30, 2007.

** **

**ITEM13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

To be supplied by amendment by April 30, 2007.

**ITEM 14.   PRINCIPAL ACCOUNTANTFEES AND SERVICES**

To be supplied by amendment by April 30, 2007.

** **

** **

| 50 |
|----|

                                                                         

----

**PARTIV**

** **

**ITEM15.   EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM8-K**

(a)           Thefollowing documents are filed as part of this Annual Report on Form 10-K:

                1.             FinancialStatements

                                SeePart II, Item 8 Financial Statements and Supplementary Data

                2.             FinancialStatement Schedule

        The following financial statement schedule ofTripos, Inc. is included in this annual report on Form 10-K.

                                                                                                                                                                   PageNumber

                                ScheduleII            -               Valuation and Qualifying Accounts                                          II-1

Schedules other than that which is listed abovehave been omitted since they are either not required, are not applicable, orthe required         information is shown in the financial statements or related items.

                3.             Exhibits- see the following Exhibit Index of this report.

                                Thefollowing exhibits listed in the Exhibit Index are filed with this report:

                                12    See Part II, Item8; Financial Statements and Supplementary Data

                                23.1 Consentof BDO Seidman, LLP, Independent Auditors

        31.1 Certificationby Chief Executive Officer pursuant to Rule 13a-14(a) under the SecuritiesExchange Act of 1934, as amended

        31.2 Certification by Chief FinancialOfficer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934,as amended

        32.1 Chief Executive Officer and Chief FinancialOfficer certification of periodic financial report pursuant to Section 906 ofthe Sarbanes-Oxley Act of 2002. U.S.C. Section 1350 

Management Contracts and Compensatory Plans -the following exhibits listed in the Exhibit Index are listed below pursuant toitem 16(a)-3 of Form 10-K:

                                10.1  Tripos, Inc. 1994 Stock Option Plan

                                10.2  Tripos, Inc. 1994 Employee Stock Purchase Plan

                                10.3  Tripos, Inc. 1994 Director Option Plan

                                10.4  Tripos, Inc. 1994 401(k) Plan

                                10.5  Amendment to the 1994 401(k) Plan

        10.6   Tripos, Inc. 1996Director Stock Compensation Plan

        10.7   Tripos, Inc. 2002Employee Stock Purchase Plan

        10.8   Amendment to the1994 Director Option Plan

        10.9   Tripos, Inc. 2005Equity Incentive Plan

        10.10 Form of ExecutiveSeverance Agreement

        10.11 Form of Indemnification Agreement withDirectors and Executive Officers

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      Pursuantto the requirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

SIGNATURES

                          TRIPOS,INC.

                By:   John P. McAlister                                                                      April17, 2007

                          JohnP. McAlister                                                                      Date

                          President,Chief Executive Officer

                          ChiefFinancial Officer and 

                          Memberof the Board of Directors

POWER OF ATTORNEY

Know all men by these presents, that each personwhose signature appears below constitutes and appoints John P. McAlister, and(with full power to each of them to act alone), his true and lawfulattorney-in-fact and agent, with full power of substitution and resubstitution,for him and in his name, place and stead, in any and all capacities, to signany or all amendments to this report on Form 10-K for the fiscal year endedDecember 31, 2006, and to file the same, with all exhibits thereto and otherdocuments in connection therewith, with the Securities and Exchange Commission,granting unto said attorney-in-fact and agent, full power and authority to doand perform each and every act and thing requisite and necessary to be done inand about the premises, as fully to all intents and purposes as he might orcould do in person, hereby ratifying and confirming all that saidattorney-in-fact and agent, or his substitute, may lawfully do or cause to bedone by virtue hereof.

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the Registrant and in the capacities and on the datesindicated.

    

|           Name |           Title |           Date |
|------------------------------------------------------------------|-------------------------------------------------------------------|------------------------------------------------------------------|
| /s/  John P. McAlister                                           | Chief  Executive Officer,                                         | April  17, 2007                                                  |
| John  P. McAlister III                                           | Chief  Financial Officer                                          |                                                                  |
|                                                                  | President  and Director                                           |                                                                  |
|                                                                  | (Principal  Executive Officer)                                    |                                                                  |
|                                                                  |                                                                   |                                                                  |
| /s/  Ralph S. Lobdell                                            | Chairman  of the Board of Directors                               | April  17, 2007                                                  |
| Ralph  S. Lobdell                                      |                                                                   |                                                                  |
|                                                                  |                                                                   |                                                                  |
| /s/  Stewart Carrell                                             | Director                                                          | April  17, 2007                                                  |
| Stewart  Carrell                                                 |                                                                   |                                                                  |
|                                                                  |                                                                   |                                                                  |
| /s/  Gary Meredith                                               | Director                                                          | April  17, 2007                                                  |
| Gary  Meredith                                                   |                                                                   |                                                                  |
|                                                                  |                                                                   |                                                                  |
| /s/  Ferid Murad                                                 | Director                                                          | April  17, 2007                                                  |
| Ferid  Murad                                                     |                                                                   |                                                                  |
|                                                                  |                                                                   |                                                                  |
| /s/  Alfred Alberts                                              | Director                                                          | April  17, 2007                                                  |
| Alfred  Alberts                                                  |                                                                   |                                                                  |

** **

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TRIPOS, INC.

SCHEDULE II-VALUATIONAND QUALIFYING ACCOUNTS

Years Ended December 31, 2004, December31, 2005 and December 31, 2006

(in thousands)

| Col. A                                                                                                                                            | Col. B                          | Col. C                        | Col. D | Col. E                     |
|---------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------|-------------------------------|--------|----------------------------|
|                                                                                                                                                   |                                 | Additions                     |        |                            |
| Description                                                                                                                                       | Balance at Beginning of  Period | Charged to Cost and  Expenses |        | Charged  to Other Accounts | Deductions Charged to  Reserves | Balance at

End of 

Period |
| Allowance  for        Doubtful Accounts                                                                        |                                 |                               |        |                            |  |  |
| 2004                                                                                                                                              | 390                             | (50)                          |        | --                         | 94 | 246 |
| 2005                                                                                                                                              | 246                             | (46)                          |        | --                         | 10 | 190 |
| 2006                                                                                                                                              | 190                             | 2                        |        | --                         | -- | 192 |
|                                                                                                                                                   |                                 |                               |        |                            |  |  |
| Valuation  Allowance for    Deferred Income Tax     Assets                                                     |                                 |                               |        |                            |  |  |
| 2004                                                                                                                                              | 5,609                           | 1,551                         |        | --                         | -- | 7,160 |
| 2005                                                                                                                                              | 7160                            | (1,163)                       |        | --                         | -- | 5,997 |
| 2006                                                                                                                                              | 5,997                           | 1,978                         |        | --                         | -- | 7,975 |
|                                                                                                                                                   |                                 |                               |        |                            |  |  |
| Inventory  Reserve for                     Obsolescence |                                 |                               |        |                            |  |  |
| 2004                                                                                                                                              | 2,520                           | 1,006                         |        | --                         | --  | 3,526 |
| 2005                                                                                                                                              | 3,526                           | (362)                         |        | --                         | --  | 3,164 |
| 2006                                                                                                                                              | 3,164                           | 2,818                         |        | --                         | --  | 5,982 |

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                                                                **ExhibitIndex**

Exhibit

Number                                                  Description

2.1a        Distribution Agreement between Tripos and E&S

3.1c        Amended and Restated Articles of Incorporation dated January 26, 1996

3.2a        Amended and Restated Bylaws of Tripos

3.3f         Articles of Amendment to the Articles of Incorporation of Tripos,Inc. dated January 26, 1996

3.4e        Articles of Amendment to the Articles of Incorporation of Tripos, Inc.dated February 4, 2000

10.1b      Tripos, Inc. 1994 Stock Option Plan *

10.2b      Tripos, Inc. 1994 Employee Stock Purchase Plan *

10.3b      Tripos, Inc. 1994 Director Option Plan *

10.4b      Tripos, Inc. 1994 401(k) Plan *

10.5c      Amendment to the 1994 401(k) Plan *

10.6 c      Tripos, Inc.1996 Director Stock Compensation * 

10.7 d      Tripos, Inc.2002 Employee Stock Purchase Plan *

10.8 d      Amendment tothe 1994 Director Option Plan *

10.9 h      Tripos, Inc.2005 Equity Incentive Plan *

10.10 j     Form ofExecutive Severance Agreement*

10.11 j     Form ofIndemnification Agreement with Directors and Executive Officers*

10.12 i     Agreementand Plan of Merger among Trips, Inc., Owl Acquisition, Inc., Optive Research,Inc., Dr. Robert S. Pearlman and Bryan S. Koontz dated December 21, 2004

10.13 j     StockPurchase Agreement among Tripos, Horizon Technology Funding Company II LLC,Horizon Technology Funding Company III LLC and Sand Hill Venture Debt III, LLCdated December 21, 2004

10.14 k    AssetPurchase Agreement among Tripos, Inc. and Tripos (Cayman) L.P. dated November19, 2006

10.15 l     Transition ServicesAgreement, dated as of March 20, 2007, by and among Tripos, Inc., Tripos, L.P.and Tripos (DE), Inc.

10.16 l     OfficeLease, dated as of March 20, 2007, by and among Tripos Realty, LLC and Tripos(DE), Inc.

10.17 m   PurchaseAgreement, dated as of February 4, 2007, by and among Tripos Realty LLC andSouth Hanley Road, LLC

10.18 m   FirstAmendment to Purchase Agreement, dated as of February 26, 2007, by and amongTripos Realty LLC and South Hanley Road, LLC

10.19 m   SecondAmendment to Purchase Agreement, dated as of March 21, 2007, by and amongTripos Realty LLC and South Hanley Road, LLC

21.1         Subsidiariesof Tripos, Inc.

23.1         Consent of BDOSeidman, LLP, Independent Auditors

24            Powerof Attorney, See the signature page

31.1         Certificationby Chief Executive Officer pursuant to Rule 13a-14(a) under the SecuritiesExchange Act of 1934, as amended

32.1         ChiefExecutive Officer and Chief Financial Officer certification of periodicfinancial report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.U.S.C. Section 1350 

*              ManagementContracts and Compensatory Plans pursuant to item 14(a)-3 of Form 10-K

a              Previouslyfiled as an exhibit to the Company's Registration Statement on Form 10 datedMay 27, 1994 (SEC File No. 0-23666) and incorporated herein by reference.

b              Previouslyfiled as an exhibit to the Company's Registration Statement on Form S-8, (SECFile No. 33-79610) dated May 31, 1994 and incorporated herein by reference.

c              Previouslyfiled as an exhibit to the Company's Form 10-K for the fiscal year ended December31, 1995 (SEC File No. 0-23666)and incorporated herein by reference.

d              Previouslyfiled as an exhibit to the Company's Proxy Statement for the May 7, 2002 AnnualShareholders' Meeting (SEC File No. 0-23666).

e              Previouslyfiled as an exhibit to the Company's Form 10-K for the fiscal year endedDecember 31, 1999 (SEC File No. 0-023666) and incorporated herein by reference.

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**ExhibitIndex (continued)**

f               Previouslyfiled as an exhibit to the Company's Form 8-K filed on March 15, 1996 (SEC FileNo. 0-023666) and incorporated herein by reference.

g              Previouslyfiled as an exhibit to the Company's Form 8-K filed on January 10, 2005 (SECFile No. 0-023666) and incorporated herein by reference.

h              Previouslyfiled as an exhibit to the Company's Proxy Statement for the  May 11, 2005Annual Shareholders' Meeting (SEC File No. 0-23666).

i               Previouslyfiled as an exhibit to the Company's Form 8-K filed on January 10, 2005 (SECFile No. 0-23666) and incorporated herein by reference.

j               Previouslyfiled as an exhibit to the Company's  Registration Statement on Form S-1/A (SECFile No. 333-123742) dated May 18, 2005.

k              Previouslyfiled as an exhibit to the Company's Form 8-K filed on November 20, 2006(SECFile No. 0-23666) and incorporated herein by reference.

l               Previouslyfiled as an exhibit to the Company's Form 8-K filed on March 22, 2007 (SEC FileNo. 0-23666) and incorporated herein by reference. 

m             Previouslyfiled as an exhibit to the Company's Form 8-K filed on March 28, 2007 (SEC FileNo. 0-23666) and incorporated herein by reference.

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