UNITED STATES

** SECURITIES ANDEXCHANGE COMMISSION**

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

**FORM 10-K**

[**X**]  Annual Report Pursuant toSection 13 or 15(d) of the Securities Exchange Act of 1934.  For the fiscalyear ended December 31, 2005.

or

[  ]  Transition Report Pursuantto Section 13 or 15(d) of the Securities Exchange Act of 1934.  For thetransition 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 |
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| Securities registered pursuant to Section 12(b) of  the Act:        |
| Title of each class                                                 | Name of each exchange on which registered: |
| None                                                                | None                                       |
|                                                                     |                                            |
| Securities registered pursuant to Section 12(g) of  the Act:        |
| Common stock, $.01 Par Value                                        |
| (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, 2005****was $18,584,154(based upon the June 30, 2005 closing price for shares of the Registrant'sCommon Stock as reported by the NASDAQ National 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, 2006, there were 10,189,593****sharesof the Registrant's Common Stock outstanding with a par value of $0.01.

**DOCUMENTS INCORPORATED BY REFERENCE**

Portions of the Registrant's Proxy Statement forthe Annual Meeting of Shareholders to be held May 17, 2006 are incorporated byreference into Part I and III.

 

**Part I**

**Item1.  Business**

** **

**Overview**

** **

Our discovery informatics and discovery researchproducts and services enable life science companies to perform their drugdiscovery.  We combine our resources in computer-aided molecular design,cheminformatics, chemistry research and production, with the expertise of scientistson our staff to address the challenges facing pharmaceutical researchorganizations. We deliver products and services internationally recognized fortheir innovation and quality.  By creating new chemical compounds and aidingour partners' design of new chemical compounds in ways that we believe are morelikely to result in drug discoveries, we offer our customers advantages interms of research cycle time, cost, and efficiency of research activities.

We have formed commercial relationships withmost major pharmaceutical companies and with many emerging biotechnologycompanies based on their use of some or all of our products and services.  Inaddition, we have established strategic collaborations with a number of thesecompanies based on our specific capabilities.  Representative pharmaceuticalclients include: Bayer, Bristol-Myers Squibb, GlaxoSmithKline, Pfizer, Sanofi-Aventis,Schering AG, Schering-Plough, Servier and Wyeth.  Representative biotechnologyclients include: Biovitrum, BioTie, CeNeS, Chronogen, SGX Pharmaceuticals, andGeminX.  

Tripos was formed in 1979 to commercializesoftware for molecular visualization, analysis and design.  In building ourdiscovery informatics solutions, we have focused on developing an integratedsuite of offerings at the leading edge of scientific research.  In addition to ourdiscovery informatics product and service offerings, we engage in chemistryresearch enhanced by informatics capabilities to produce high-value productsand services that directly impact our customers' discovery research.  In certaincases with customers, these capabilities have created opportunities for us toparticipate in research collaborations, in which we have the potential formilestones and/or royalty interests in early-stage new drug candidates.

Our business model is based primarily onderiving recurring revenues from our discovery informatics and discoveryresearch businesses and secondarily on achieving contributions from therapeuticcollaborations if and when new therapeutics are developed.  The following is adescription of each area of our business:

       i.       *DiscoveryInformatics Products and Services.*  The SYBYL® and UNITY®software suites are the foundation of our discovery informatics product(software) offerings.  These suites provide integrated tools for computer-aidedmolecular modeling and visualization, virtual screening (docking),combinatorial library design, data storage and analysis, and structure-activityrelationships to customers in pharmaceutical, biotechnology and related lifescience fields of research.  We offer over fifty (50) software products forthese research areas.  Keycomponents of these products are being packaged as web services as part ofTripos' Service-Oriented Informatics strategy, designed to make the company'svaluable discovery tools adaptable to each scientist's workflow in the newrapidly evolving informatics environment.  In 2005, we launched the Windows®-basedBenchwareTM suite, used by laboratory researchers to support synthesisand testing decisions; digitally store, search and retrieve researchinformation; and share experimental results with project team members,including computational scientists.  These products and technologies are providedto our customers through a license arrangement, while certain of theenterprise-wide technologies also involve systems integration and other servicesto facilitate a smooth implementation.  Customized software developmentprojects can also be an avenue to assist customers to resolve specific researchissues that require new scientific methods, techniques and analytical tools.

     ii.       *DiscoveryResearch Products and Services.*Tripos Discovery Research Centre's laboratories,based in the United Kingdom, offer compound design and synthesis, molecularanalysis, a complete suite of lead discovery and lead optimization capabilitiesand newly introduced target-specific chemical libraries on which Tripos hasapplied for patent protection. Tripos offers off-the-shelf libraries of compounds sold forpharmaceutical screening purposes.  We also participate with our customers instrategic chemistry research projects, primarily on a fee for service basis.   Ina few cases, the transfer of intellectual property rights for these therapeuticcollaborations may include royalty or milestone payments associated withadvancement of the compounds through various stages of drug development.  Inaddition, Tripos' newly introduced target-specific libraries are intended to bea platform for our further collaborative development with clients.

Tripos was founded 27 years ago by ProfessorGarland Marshall of the Washington University School of Medicine for thepurpose of commercializing discovery research software tools.  Tripos waspurchased from its founder in 1987 by Evans & Sutherland ComputerCorporation ("E&S").  In 1994, Tripos was spun-off in a tax-freedistribution to E&S shareholders.  We acquired our chemistry researchcapabilities, based in Bude, Cornwall, England, in late 1997 and also beganoffering discovery informatics consulting services in 1997.

** **

**IndustryBackground**

The demand for our productsand services is driven by fundamental change in the business of the largestpharmaceutical companies.  These companies face significant pressures todevelop new drugs that can generate substantial return on development costswhile also contributing to improved health and life expectancy for the generalpopulace.  According to the Tufts Center for the Study of Drug Development, the average cost to bring a new medicine successfully to market canexceed $800 million.  The pressures on pharmaceutical companies are twofold: toreduce the time (and therefore the cost) of developing new drugs, and todiscover and develop a greater number of new drugs with fewer side effects or,to see a greater number of their drug candidates emerge from their R&Dpipeline as approved and successful therapeutic products. Dramaticallyillustrating the extent of the productivity crisis in the pharmaceuticalindustry, the United States Food and Drug Administration approved just 14 newmolecular entities (NMEs) in 2005, down from 31 NME's in 2004.  Additionally,six blockbuster drugs are set to come off-patent in 2006, putting furtherrevenue pressure on the pharmaceutical industry.  Finally, following thewithdrawal of Vioxx, the industry is facing intense scrutiny from regulatorsand patients alike. Mergers in the industry continue to occur at the same timeas some biotechnology companies reach the size of traditional pharmaceuticalcompanies.  One way pharmaceutical companies are responding to these trends isby in-licensing drug candidates from biotechnology companies as early as thelate lead optimization/early pre-clinical stage of drug discovery.  Competitionis intense for these assets, and thus licensors are being required to commitsignificant financial sums to acquire these drug candidates.  

*Outsourcing. *For the past two decades, pharmaceutical companieshave searched for new ways to increase their product pipelines which hascreated volatility in their investment in research and development activities. As the pressures mount to continue product development while simultaneouslyrationalizing research and development expenditures, pharmaceutical companieshave turned to outsourcing.  In the past, pharmaceutical companies haveoutsourced tasks such as management of clinical trials or certain parts of themanufacturing process.  Beginning in the 1990s, research outsourcing by majorpharmaceutical companies has dramatically increased due to pressures todecrease time-to-market, reduce costs, and improve the yield on internalresearch and development activities.  According to an ING Barings market study,approximately 10% of early stage discovery activities are currentlyoutsourced.  In another recent market study, the market size for discoveryresearch outsourcing was estimated at $1.8 to $2.3 billion globally, withapproximately 30% of that amount related to chemistry services andcollaborations.  These figures were expected to grow by 10-12% over a five-yearperiod.  The future influx of targets from genomics alone may result in a 20%to 25% growth rate in new drug targets, and is expected to further impactoutsourcing.  While the global drug discovery outsourcing in the market is setto grow, the market share enjoyed by the leading Western providers has beenshrinking in recent years.  The primary factor has been the emergence oflow-cost chemistry providers, particularly in India and China.  Wary of their need to manage costs aggressively, pharmaceutical companies are outsourcingchemistry activities, especially work with lower intellectual propertysensitivity, to these countries.  For instance, recently, Wyeth entered anagreement for 150 Full-Time Equivalent staff ("FTE") with a vendor in India to provide synthetic chemistry.  In contrast, we believe there continues to be ampleopportunity for high-intellectual property content research to be performed byWestern research partners to the industry, potentially in collaboration withthe low-cost far-shore suppliers.

*The InformationRevolution.*  Rapid changes inindustry, academic and government research in recent years have resulted in thegeneration of vast amounts of biomolecular, chemical and other scientificdata.  Included is information related to the gene sequence, variation,expression, and function, along with protein structure and function andbiological target pathway data.  When coupled with the attendant volumes ofstructure-activity data generated by high-throughput chemistry andhigh-throughput screening technologies, the quantity of data/information isoverwhelming.  In addition to a need for tools that enable analysis anddecision-making on an unprecedented scale, there is increasing awareness thatclarifying the relationship between biological targets and the particularchemical compounds with which they interact could significantly streamline thesuccess of drug discovery.  Until recently, traditional drug discovery researchwithin pharmaceutical companies has not effectively incorporated thesemethods.  In order to realize the full potential of the relationships that linkthe various disciplines in discovery, we believe new information technologytools will be required. 

*Importance of smallmolecule drug discovery. *Despite recentgains in biotechnology, small molecule drugs, which are invented and designedby chemists, remain the drugs of choice by healthcare professionals and theirpatients.  While large molecule drugs potentially have safety and efficacyadvantages, small molecule drugs have other advantages over protein-basedtherapeutics, including a greater universe of treatable diseases, lower costwith greater ease of manufacturing, and the ease of administration of pillsversus injections.

The Tripos Business Model

** **

Throughour discovery informatics and discovery research products and services we offercomprehensive, customized solutions to address many of the discovery researchneeds of our customers.  We apply computational design and analysis skills inour laboratories, where we employ our software technologies to develop newchemical entities for our customers.  Applying this scientific discipline, wehave developed and applied informatics solutions that incorporate the fullarray of biological, chemical, screening and other scientific data along withcomprehensive data mining and analysis, to meet the needs of the discoveryscientist, whether on our staff or our customer's staff.  By being anintegrated provider, we can best ensure the delivery of higher value to ourclients.  This differentiation is leveraged in higher returns to Tripos infees, and in selected cases related to our discovery research business,potential milestones and royalties on future drug licensing events or revenues.

Thedifferentiating element in Tripos' offerings is integration of the science,software, information technology and laboratory research into a comprehensivesolution for use in customers' drug discovery process.  To achieve thissolution, we:

I.   Offer software tools with leading-edgecapabilities in a variety of applications, including 3-D molecular simulationand prediction of molecular structure and activity, data storage and analysisand *in silico* (computational research methods as opposed to laboratorymethods) screening for biological activity;

II.   Leverage our knowledge of life sciencesand pharmaceutical discovery processes to develop and implement informaticssolutions that improve research knowledge management to enable incisivedecision-making based on data access and data analysis;

III.   Operate state-of-the-art chemistryresearch facilities and processes to deliver high-quality compounds that canrapidly lead to new chemical entities; 

IV.   Work with customers using ourknowledge-driven chemistry approach to perform strategic chemistry researchtailored to their specific requirements; and

V.   Provide integrated medicinal chemistryservices whereby our chemists are able to perform multi-parameter optimizationto generate new molecules of interest that interact with disease targets, potentiallyhelping create intellectual property of potential high value to our clients.

** **

**Strategy**

** **

We are a leading integrated provider of productsand services for the drug discovery needs of pharmaceutical and biotechnologycompanies around the world.  Key elements of our growth strategy are asfollows:

*Maintain Leading-Edge Discovery InformaticsInnovation. *Relyingon 27 years of leadership in this field, we  continue to invest in new releasesof our products, develop new applications, and create new technologies to meetthe changing demands of researchers.  We also pursue software research anddevelopment collaborations with our customers to rapidly advance thestate-of-the-art in computational science while developing new products that wemay market in the future.  

*Expand into the Underserved IntegratedLaboratory Informatics Market*.  We endeavor to deliver innovative informaticsproducts that our customers can use to resolve their strategic informaticsproblems.  We have experience in developing operational informatics systems andwill apply the pharmaceutical industry domain expertise of our scientists todevelop innovative solutions that improve research operations through effectiveknowledge management.  Technologies such as our Benchware Notebook, BenchwareSMART-IDEA, Benchware 3D Explorer, Benchware HTS DataMiner, Benchware Dock andother solutions aid in knowledge capture, cross-team collaboration and decisionmaking in the laboratory ultimately directed toward enabling more efficient andbetter decisions in the research process. 

*Drive Chemistry Research Efforts.* We have fullyintegrated chemistry research and design capabilities that are driven by ourin-depth knowledge of chemistry, informatics and computer-aided drug discoveryresulting in the highest quality research.  We have continued to invest in ourchemistry research facilities and in our scientific expertise due to our beliefthat these capabilities are an essential component in helping our customersmeet their research and development needs. To facilitate the delivery of thehighest value to our customers in the shortest cycle time, we have recentlyintroduced biological screening capability funded in part through a Marie Curiegrant awarded in June 2005 by the European Union.  This capability also enablesus to fully engage the lead optimization process for our customers andinternally.

*Expand Value Creation Through InnovativeLaboratory Offerings.* Using all aspects of our informatics and laboratory capabilities including ourproprietary and patented ChemSpace® methodology, we will endeavor to unlockvalue through novel offerings and relationships that deliver intellectualproperty to our clients.  Our ability to quickly design, develop, and testcompounds in relevant therapeutic target areas, either client-specified orinternally identified, gives us access to collaborations that realize valuebased on our unique intellectual contribution, exceeding pure fee for servicepayments and ensuring continued relevance in the face of expanded competitionfrom suppliers of chemistry services located in low-cost areas of the world. Based on this model, we believe we can derive contracts that have components ofhigher-margin fee-for-service plus milestones for mutually agreed progressthrough drug development.  In selected cases, we may also generateopportunities for participation in downstream commercialization milestones andin  licensing or product revenues based on our contribution to the programs.

*Pursue Strategic Alliances. *We will continue to seekstrategic arrangements with large and small life sciences companies.  We willalso be attentive to opportunities to enhance, expand or complement our areasof expertise, including through potential product acquisitions or otherstrategic transactions.  Partnerships are key toour service-oriented informatics strategy. Third party products that we marketexclusively were developed by leading scientific researchers in the field.  We haveentered into partnerships with Scitegic, Elevier MDL, CambridgeSoft, andInforSense to ensure that our products operate seamlessly with the software ourcustomers license from other suppliers of drug research software applications.  Aspart of our commitment to bring best-of-class software to our customers, weentered into an agreement with Composite Software to incorporate theirenterprise information integration technology into new products planned for theBenchware suite.  

 

In January 2005, we acquired Optive Research,Inc.  Through this acquisition, we gained access to 15 software productsdeveloped by Optive either independently or sponsored by the University ofTexas that are complementary to Tripos' existing and future products.  Some ofthese products have been used to expand our Benchware product strategy, whileothers, such as EA-InventorTM, have bolstered our molecular modelingsoftware suite.  We also gained talented scientists and executives from Optive forour team.

**Productsand Services**

Tripos' business model is based on our abilityto deliver an integrated offering of technologies for *in silico*discovery for expert computational scientists and experimentalists,information-rich chemical libraries, and collaborative chemistry researchprojects.  The following summarizes some of the key components of our productsand services.

***DiscoveryInformatics Products***

* *

DiscoveryInformatics products offer customers the ability to accelerate theidentification and optimization of new compounds that have the potential tobecome drug products.  Tripos' design tools improve the efficiency of the researchprocess by identifying physical and structural properties of molecules that arelikely to make them suitable as drugs, and then use this information to designnovel molecules that possess these properties.  These calculations are based oncomplex pattern analysis and 3D simulation of chemical structures andbehaviors, and often involve many thousands of molecules.  By viewing andanalyzing the results of calculations done with Tripos' software products,scientists can make decisions about which compounds to move forward in theirresearch.  Tripos discovery software enables scientists to avoid costlysynthesis and testing expenses for chemical compounds that are not likely to beeffective and to quickly design the experiments most likely to advance a project. Our proprietary software is used by scientists at major research facilitiesaround the world to manage, analyze and share biological and chemicalinformation. 

The cornerstone of ourdiscovery software suite is SYBYL, an expert's platform for molecular design,analysis, and visualization.  The SYBYL product is a comprehensivecomputational toolkit that simplifies and accelerates the discovery of drugsand other new chemical entities.  Software marketed by Tripos, includingproducts obtained in the acquisition of Optive Research, supports the followingapplication areas: 

| **SYBYL****Ò*******Expert platform**for molecular design,  analysis, and visualization.* |
|-----------------------------------------------------------------------------------------------|
| **Research  Area**                                                                            | **Application  Area** | **Software** | **Description** |
| **Expert  Molecular Modeling Environment**                                                    | Molecular  Modeling & Visualization | SYBYL ® | Provides  a complete computational chemistry and molecular modeling environment |
| MOLCADTM                                                                                      | Visualize molecular surfaces and properties |
| DynamicsTM                                                                                    | Investigate  and visualize molecular structure and mobility |
| Advanced Computation                                                                          | Explore the conformational properties of compounds |
| SavolTM                                                                                       | Calculate molecular surface and volume properties |
| **Ligand-Based Design**                                                                       | SAR & ADME | QSAR with CoMFA® | Build predictive  structure-activity and structure-property models |
| Advanced CoMFA®                                                                           | Refine and enhance  3D QSAR models |
| HQSARTM                                                                                       | Perform automated  QSAR analyses |
| VolSurfTM                                                                                     | Predict ADME  properties |
| AlmondTM                                                                                      | Calculate and  utilize alignment-independent molecular descriptors |
| DistillTM                                                                                | Determine and  visualize SARs |
| Molconn-ZTM                                                                                   | Compute descriptors  for use in QSAR/QSPR models to produce chemically interpretable results |
| ClogP / CMR                                                                                   | Include molar  refractivity and logP in QSAR and ADME models |
| Pharmacophore Perception                                                                      | GALAHADTM | Refine  pharmacophore geometries |
| TupletsTM                                                                                     | Pharmacophore-based virtual screening |
| FlexSTM                                                                                       | Perform shape-based screening of ligands in the  absence of a receptor structure |
| GASPTM                                                                                        | Use  full conformational flexibility to develop pharmacophore hypotheses |
| DISCOtechTM                                                                                   | Elucidate pharmacophore models from pre-calculated  conformers |
| **Receptor-Based  Design**                                                                    | Docking | FlexXTM  | Flexibly dock ligands into a binding site |
| FlexX-PharmTM                                                                                 | Flexible docking under pharmacophore constraints |
| FlexETM                                                                                       | Consider protein flexibility during docking  calculations |
| CombiFlexX®                                                                               | Rapidly dock combinatorial libraries into a receptor  site |
| CScoreTM                                                                                      | Rank the affinity of compounds bound to a target with  consensus scoring |
| De  Novo Design                                                                               | EA-InventorTM | Provides robust and controlled structure modifications |
| RACHELTM                                                                                      | Sophisticated tools for optimization of lead compounds |
| LeapFrog®                                                                                 | Perform *de novo* ligand design |
| **Structural  Biology**                                                                       | Macromolecular  Modeling | BiopolymerTM | Predict, build, and visualize molecular 3D structures |
| ProTableTM                                                                                    | Analyze and assess the quality of protein structures |
| SiteIDTM                                                                                      | Find and visualize protein binding sites |
| ComposerTM                                                                                    | Construct 3D homology models of proteins |
| Bioinformatics                                                                                | FUGUETM | Use inverse-folding techniques to build 3D models of  proteins form sequence |
| GeneFold®                                                                                 | Recognize distant homologues by sequence-structure  comparison |
| MatchMakerTM                                                                                  | Identify protein function from sequence |
| **Library  Design**                                                                           | Library  Creation | LegionTM/CombiLibMakerTM | Construct virtual compound libraries |
| OptDesign®                                                                                | Design and edit combinatorial libraries |
| Molecular  Deversity                                                                          | SelectorTM | Characterize and sample compound libraries |
| DiverseSolutions®                                                                         | Design, compare, or select compound libraries |
| **Cheminformatics**                                                                           | Data  Mining | UNITY® | Locate compounds in data bases that match a  pharmacophore or fit a receptor site |
| Auspyx®                                                                                   | Store and search chemical structures and relational  data directly inside Oracle® databases |
| HiVolTM                                                                                       | Analyze and filter high volume datasets |
| Structure  Representation                                                                     | Concord® | Generate accurate 3D coordinates |
| ConfortTM                                                                                     | Generate sets of diverse, low energy conformers |
| StereoPlex®                                                                               | Expand the stereochemical diversity of a database |
| ProtoPlexTM                                                                                   | Rapidly generate protomers and tautomers of chemical  compounds |
| StructureFilterTM                                                                             | Filters  lists of structures using user-specified criteria |
| MM3TM (2000)                                                                                  | Optimize structures by molecular mechanics |
| MM4TM (2004)                                                                                  | Apply molecular mechanics to calculate accurate  molecular structures and energies |
| **Research  Area**                                                                            | **Application  Area** | **Software** | **Description** |
| **Supplementary Technologies**                                                                | Molecular Descriptors & Interactions | AMPACTM | Rapidly calculate  transition states and spectral properties using semi-empirical quantum  mechanics |
| GSSITM                                                                                        | Model solution-phase properties through  the consideration of solute-solvent interactions |
| hint!  ®                                                                                  | Quantify and visualise  non-covalent interaction energies |
| HSCFTM                                                                                        | Performs  semi-empirical molecular orbital (MO) calculations |
| ZAPTM                                                                                         | Rapidly simulate robust and accurate  electrostatic interactions |
|                                                                                               |  |

We believe Tripos is well positioned to meet thegrowing demand in the life sciences industries for integrated, managed,accessible research information that spans all aspects of an organization's discoveryefforts.  The highly specialized research environments of these industriesrequire an experienced understanding of the discovery process.  We draw uponover 27 years of experience developing scientific software applications for thepharmaceutical and biotechnology industries.  

In an effort to expand the market for ourofferings and to deliver the value of decision-support systems more broadly inthe customers' organizations, Tripos has developed and deployed operationalinformatics technologies designed to enhance everyday laboratory activities --such as experiment management, workflow and logistics.  We have experience inresearch and development of novel strategic informatics technologies that focuson scientific data analysis, predictive science and decision support for largepharmaceutical organizations.  These strategic systems capitalize onexperimental work by maximizing the utility of generated data and their valuein ongoing and future research programs.

| **LABORATORY   INFORMATICS ***Tools   and applications designed to support typical laboratory operations*

** ** |
|----------------------------------------------------------------------------------------------------------------------------|
| **Products**                                                                                                               | **Description** |
| Benchware  Notebook                                                                                                        | Customer-proven, enterprise  electronic laboratory notebook (ELN). |
| Benchware  SMART-IDEA                                                                                                      | Customer-proven enterprise  information access, management, analysis and decision support system. |
| Benchware  3D Explorer                                                                                                     | Provides the means for any  life science researcher to make more informed decisions by employing 3D  molecular visualization. 

Formerly  marketed by Tripos under the product name LITHIUM®. |
| Benchware  Dock                                                                                                            | Enables laboratory chemists  to rapidly test compound ideas, prior to synthesis, against 3D models of  target protein structures, using docking calculations previously defined by  molecular modeling specialists. |
| Benchware  HTS DataMiner                                                                                                   | Offers  functionality dedicated to the location, definition and prioritization of  prospective lead series from screening data sets of any size. Formerly  marketed by Tripos under the product name SARNavigatorTM. |
| Benchware  LibraryMaker                                                                                                    | Offers a range  of product-based library enumeration features for rapidly enumerating  parallel compound libraries as well as very large virtual combinatorial  libraries. |
| Benchware  LibraryDesigner                                                                                                 | Helps laboratory  chemists decide which reactants to use when making parallel compound  libraries as well as very large virtual combinatorial libraries. |

Finally, Tripos'platform technologies today include chemical data cartridge, enterpriseinformation integration, and other middleware technologies that help ourcustomers deploy and use our software throughout their enterprise.  Tripos'platform technologies enable our customers to deploy our software in aloosely-coupled, web service-oriented environment by using industry standardtechnologies and messaging protocols, such as the Simple Object AccessProtocol, the preferred protocol for exchanging web services today.  Ourpalette of available informatics web services is expected to grow throughout2006.

| **PLATFORM TECHNOLOGIES**

*Flexible options for developing,   deploying and accessing discovery informatics technologies and applications* |
|---------------------------------------------------------------------------------------------------------------------------------------------|
| **Products**                                                                                                                                | **Description** |
| Tripos Foundation   Server                                                                                                                  | •            An   industry-standard based application server providing access to Tripos and   third-party discovery informatics web services |
| Tripos Web Services                                                                                                                         | •            A   collection of web service wrappers for key Tripos Discovery Informatics   products. Available through the Tripos Foundation Server |
| AUSPYX®                                                                                                                                 | •            Enables   storage and searching of chemical structures and properties within Oracle®   relational databases

** ** |
| Tripos Components for   Pipeline PilotTM                                                                                               | •            Integration   components  to SciTegic's Pipeline Pilot application for the following   Tripos tool:

•           Concord

•           Confort

•           FlexX

•           CScore

Benchware 3D Explorer |

***DiscoveryResearch Products******(LeadQuest******Ò******and LeadSelect******TM******Compound Libraries,LeadDiscovery******Ô******Programs and Discovery Research Services).***

One foundation of our discovery researchbusiness is our LeadQuest screening library product, a unique set ofapproximately 50,000 compounds that meet our stringent diversity and puritycriteria.  The LeadQuest compounds are based on an understanding of biologicalrelevance and are suitable for initial screening of any biological test system. The LeadQuest library is an efficient source of compounds for screening thateliminates redundant and impure samples from the screening effort.  Whencompounds in the LeadQuest library demonstrate appropriate activity inbiological assays, we can quickly design and synthesize hundreds of similarcompounds for rapid follow-up screening and lead optimization.

We deliver high levels of purity in order tomake our customer's screening process efficient and cost-effective.  Allcompounds are subject to thorough analytical testing, and purity data is madeavailable to customers.  To that end, during 2005 we completed a qualityassessment of our LeadQuest libraries and compounds falling outside ourstringent purity criteria were removed from the collection. The design strategybehind the LeadQuest library exploits our proprietary and patented ChemSpacetechnology, and improves the efficiency of the screening process by minimizingthe number of compounds that must be screened in order to find a leadcompound.  The compounds in the LeadQuest library are designed to representchemistry space uniformly while minimizing overlap with an existing screeningrepository and avoid redundant sampling.

Our Discovery Research scientific capabilitiesenable us to partner with pharmaceutical and biotech companies to advance theirresearch programs.  We offer our customers expertise in compound design,compound synthesis, molecular analysis, lead discovery, lead optimization, andmedicinal chemistry to facilitate research activities.  For instance, using ourLeadQuest library, in concert with biological data generated as part of a drugdiscovery program, we can specially design focused libraries suitable forfurther research by our customer.  We accomplish this by again using ourChemSpace technology to accelerate the discovery of new chemical entities withthe desired pharmacological profile.  Teaming ChemSpace with data available inthe public domain (patent filings, published research, etc.) allows ourscientists to provide our LeadHopping® services to navigate throughheavily researched and protected areas to help our customers find novelchemical families of structures and to seek out new lead series to avoidproblems with toxicity, metabolism, excretion, and absorption.

In mid-2004 we began using our researchcapabilities to investigate several specific known biological target areas ofinterest to a large number of pharmaceutical and biotechnology firms.  Thiscovered Kinases and G-Protein Coupled Receptors.  In this process, wesynthesized compounds we believe to be novel based upon our proprietary designand searching methodologies and had a selected sample of compound libraries ora portion of the compounds within a library screened externally for biologicalactivity and selectivity against the target for which they were designed. Based on the outcome of these results, we designed and synthesized new librariesof compounds and iterated this process to further develop the intellectualproperty and hence value associated with these libraries.  We launched theseLeadDiscovery packages to our customers both as products and as initiators innew collaborative research programs during 2005.

In late 2005, Tripos developed a program calledLeadSelect to provide high value custom libraries to our clients whilesimultaneously funding development of a new generation of LeadQuest librariesfor our own commercialization.  Based on our extensive experience in literaturemining and informatics capabilities, Tripos scientists have prepared an expandedcollection of new chemical scaffolds that can be used as starting points forcustom libraries for clients.  Under this program, jointly designed compoundsare delivered to customers.  Customers may optionally receive limitedexclusivity on the compounds.  Depending on this outcome, the compounds may beimmediately or subsequently entered into the LeadQuest offering.

* *

*Other Offerings*.  Tripos can offerbiological screening of compounds for clients to speed research projects basedon our recently introduced capability funded by the Marie Curie grant.  Thisallows us to provide rapid turnaround on projects and enhanced value to our clients. Based on our extensive experience and highly automated laboratory environment,Tripos has also introduced a High Throughput Analysis and Purification serviceto assess and process customers' compound collections.  Given this uniquecapability developed by Tripos related to the Pfizer collaboration, thisservice is a high value offering at low cost to us.

Our laboratory capabilities were acquired inlate 1997 along with an initial staff of 8 and were expanded over subsequentyears to meet customer demand.  The laboratories are based in Bude, Cornwall, England and have a staff that numbers 161 as of December 31, 2005.  In January2006, we completed a reduction in force that we announced in December 2005following the completion of our four year $90 million chemical compound fileenrichment project with Pfizer Inc.  We reevaluated the staffing levelsrequired to continue to provide our customers with the highest-quality serviceand concluded that a staff reduction of 76 was necessary.  Our laboratories consistof a 20,000 square foot state-of-the-art research center constructed in 1999along with a 48,000 square foot addition completed in early 2004, bringing thetotal facility to 68,000 square feet.

***Hardware Sales***

We have historically sold computer systems toour customers upon request only as a convenience; as such we did not expect norrealize high margins on these products.  Sales in this area have become insignificantover time. 

** **

**Collaborationsand Customer Relationships**

** **

Our growth strategy is based on expandingrelationships with large pharmaceutical and biotechnology companies to offermultiple Tripos products and services to enhance their drug discoveryoperations.  Below are some of our major collaborations:

***CustomerRelationships:***

*Bristol-Myers Squibb**. *In December 2000 weinitiated the first phase of a program with Bristol-Myers Squibb (BMS) todesign and implement an integrated research informatics system.  Working withBMS and Accenture LLP, we developed an enterprise-wide program to provide a newdecision support capability to accelerate drug discovery.  The system, titledSMART-IDEA, incorporates our MetaLayerTM software and was deployed by BMS totheir research staff numbering more than 1,500 scientists, during 2002.  InSeptember 2003, we entered into an extension to our then current agreement withBMS to integrate our FormsBUILDERTM technology, a forms-based querying tool forretrieval and browsing of research data, into the SMART-IDEA application.  Thisform-based searching technology enables scientists to easily customize theirown forms and combine queries requesting chemical structures with associateddata from experiments in many areas.  The FormsBUILDER technology was deployedat BMS in 2004.  We have a continuing relationship to deploy staff on-site atBMS to support and enhance these technologies.

 

*Pfizer, Inc.*  In January, 2002, weentered into a strategic collaboration with Pfizer for up to four years andoriginally up to $100 million to design, synthesize and purify high-quality,drug-like compounds to expand Pfizer's chemistry compound collection.  Theoriginal contract called for a minimum two-year commitment from Pfizer.  Uponcompleting the first two years of the contract, the relationship was amended inearly 2004 to reflect a reduction in compound collection production and acorresponding move into next-stage hit follow-up work between Tripos andPfizer.  The amendment also reflected a further minimum commitment for 2004 andexpected overall 4-year revenue of $90 million.  The collaboration wassuccessfully concluded in December 2005, with Tripos having achieved, and inmany cases exceeded, every research project goal.

In a separate transaction in October 2004,Pfizer renewed and increased their multi-million dollar, multi-year agreementto license the Tripos suite of discovery software technologies, including theSYBYL and UNITY software products, to Pfizer research locations worldwide.

 

*Schering AG**. *In August, 2002, Triposbegan a collaboration with Schering AG to develop an integrated chemicalinformation management system that would allow Schering scientists to manageinformation, plan syntheses, order reagents and track all their chemical assetsglobally.  This system is known as the Enterprise Chemical Information ManagementSystem (ECIMS).  The ECIMS system was successfully delivered and rolled out toover 250 of Schering's worldwide research scientists during 2005.  Tripos andSchering have continued their collaboration for the maintenance and enhancementof the technology.

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*Wyeth Pharmaceuticals.*  In December 2005, after a competitive process, Wyeth selected Tripos' discovery informatics technology as the basis for its next-
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generation discovery IT solution to be used by scientists throughout Wyeth's worldwide discovery operations.  Wyeth's new scientific workbench, along with a
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related integrated data repository, will facilitate cross-team collaboration to improve the way Wyeth scientists capture, manage and use key scientific data to efficiently
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 make decisions.  The workbench is based on Tripos' SMART-IDEA technology, the solution Tripos developed in collaboration with Bristol-Myers Squibb Co.
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(BMS) and then deployed throughout BMS's U.S. and Canadian research facilities.
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*Chronogen Inc.* In January 2004, weentered into a three-year collaboration with Chronogen to discover and optimizesmall-molecule therapeutics for cardiovascular disorders.  Under the agreement,we are employing our knowledge-driven chemistry process to provide completedrug discovery chemistry services for Chronogen.  Drawing upon our chemicallibraries, expertise in data analysis, design tools and rapid syntheticfollow-up capabilities, we are supporting Chronogen's biological expertise inmetabolic pathways related to aging.  Chronogen has been applying its *invitro*and *in vivo* screening technologies to rapidly select effectivemolecules, and we are optimizing those molecules for specific cardiovascularindications.  Tripos is paid on a fee for service basis with the potential forsuccess-based milestones.

 

*Divergence, Inc.* In June 2004 we entered into a collaboration with Divergence, Inc., a leader ingenomics-based discovery of solutions for the prevention and treatment ofparasitic infections in plants, animals, and people.  We employed our chemistryknowledge base and knowledge-driven chemistry process to expandstructure-activity-relationship (SAR) models and optimize appropriatecandidates for parasite control.  We received research payments during thecollaboration which was successfully completed in September 2005.

*European MolecularBiology Laboratory* (EMBL).  In July 2004 we entered intoa multi-year relationship with EMBL and the German Cancer Research Centre(DKFZ), to assist in rapid identification of potential molecular leads.  Weemploy our chemistry knowledge base and associated knowledge-driven chemistryprocess to facilitate rapid hit finding, hit follow-up and chemicaloptimization of candidate molecules for a wide range of projects.  We willreceive research funding during the relationship.

*Strida Pharma Inc.* In August 2004 we entered into a multi-year joint collaboration with StridaPharma Inc. to support Strida's cancer therapeutics development program.  Weare working to identify, design and synthesize suitable compounds for biologicalactivity assessment in a high-throughput screening assay developed byNovaScreen Biosciences Corporation.  Tripos is paid on a fee for service basis.

*Sanofi-SynthelaboRecherche.*  In September 2004 we entered into a strategiccollaboration with Sanofi-Synthelabo Recherche, an affiliate ofSanofi-Aventis.  Working with proprietary therapeutically relevant chemistrymotifs identified by Sanofi-Synthelabo Recherche, we employed ourknowledge-driven chemistry approach to design and synthesize compounds thatexpand these areas of therapeutic interest.  We received research paymentsduring the collaboration which was successfully completed in early 2005.

*BioTie TherapiesCorp.*  In December 2004, we entered into a collaboration withBioTie to enhance BioTie's drug discovery efforts, which include innovativemedicines for the treatment of dependence disorders, inflammatory diseases andthrombosis.  We are using our LeadHopping technology with the goal ofidentifying a backup series for one of BioTie's key drug discovery programs. Tripos is currently synthesizing compound libraries for in-house screening byBioTie. Tripos is paid on a fee for service basis with the potential forsuccess-based milestones.

*Biovitrum.* Our collaboration withBiovitrum in the discovery informatics area enhanced the GASPTM software tool,which applies a genetic algorithm to a set of compounds active against a commontarget.  Molecules that match the models created in GASP are more likely to beactive, making this an important tool to identify other active structuralseries in large corporate databases.  Tripos released the new softwaretechnology, GALAHADTM to the market the third quarter of 2005. 

*CeNeS Pharmaceuticals Ltd.** *In 2004 we entered intoa joint research partnership with CeNeS to identify new compounds activeagainst the clinically validated target caetchol-O-methyltransferase (COMT). In April 2004 we announced that we had reached important milestones as part ofthe ongoing collaboration, with Tripos Discovery Research Ltd. having utilizedits knowledge-driven chemistry process to facilitate rapid lead identificationand chemical optimization of candidate molecules.  This program has recentlybeen extended again with ongoing research payments*.*

*Servier.** *Servier has partneredwith us to design and synthesize compounds for potential drug development inundisclosed target areas.  Tripos is employing its ChemSpaceandLeadHopping proprietary technologies and integrated knowledge-driven chemistryprocesses to identify additional novel chemistries.  We are paid on a fee forservice basis.

***Collaborations:***

*CambridgeSoft Corporation. *Tripos andCambridgeSoft formed an alliance to ensure compatibility between Tripos'Benchware suite of laboratory informatics products and the latest versions ofCambridgeSoft's ChemOffice(R) application suite, including the ChemDraw(R)chemical sketching tool.

* Composite Software*.  Tripos is committedto bringing best-of-class solutions to its customers.  As part of thatcommitment, Tripos entered an agreement with Composite Software to incorporateits enterprise information integration technology into Metalayer, Tripos'discovery information integration solution, and a key component for SMART-IDEA,the integrated discovery environment developed in partnership withBristol-Myers Squibb, and being extended and implemented for Wyeth.

* Elsevier MDL*.  We haveformed a strategic alliance with Elsevier MDL to strengthen the integrationbetween our respective software products, including new-generation MDL(R)Isentris(R) technology and Tripos' Benchware suite of laboratory informaticssoftware. The collaboration creates a powerful, integrated discoveryinformatics platform for the companies' joint customers. Under the agreement,Tripos becomes a Strategic Member of the MDL(R) Isentris(R) Alliance, andElsevier MDL joins the Tripos Alliance Program as a Global Strategic Partner.The companies will each receive training, software and other support to ensurehigh-quality integration between the companies' respective products.

* InforSense. *Tripos andInforSense formed an alliance to integrate Tripos' discovery informaticsportfolio with the award-winning InforSense KDE workflow-based integrativeanalytics platform. Through the alliance, Tripos joins InforSense's OpenWorkflow Partner Network (OWPN) and InforSense joins Tripos' Alliance Programas a Software Partner. The two companies will also integrate Tripos' AUSPYX,SYBYL and UNITY technologies with both InforSense KDE and its 'in Oracle'enterprise analytics system, InforSense IOE. This integration enables customerswho are using technology from both companies, to access and integrate Tripos'discovery informatics technologies within InforSense KDE, thus streamliningcomplex discovery processes to deliver more efficient decision-making andimproved productivity.

* SciTegic.*  Tripos hasjoined SciTegic's independent software vendor (ISV) partner program to providesoftware compatibility between their product lines. Joint customers may nowchoose to access Tripos' discovery informatics technology from withinSciTegic's Pipeline Pilot framework, leading to more efficient and repeatablediscovery processes.

** Sales,Marketing and Distribution**

We market our productsand services directly in the U.S., Canada and western Europe. We market ourproducts through an exclusive distributor arrangement in Japan and Australia, and through non-exclusive agency relationships in Brazil, Korea, China, Singapore, Taiwan, Malaysia, and India.  On December 31, 2005, our sales organization included52 employees performing these roles, sales management, pre- and post-salesscientific staff,, field and tele-sales along with sales administration.   Twenty-eightwere in the United States and Canada plus****twenty-four in Europe.  Our domestic sales and support center is located at our headquarters in St. Louis, Missouri.  Sales representatives are located in or near key research areasaround the U.S.  We also maintain sales offices near London, Paris and Munich. 

The sales staff includesemployees with Ph.D. degrees in chemistry, various advanced degrees in thesciences and work experience with various hardware and software suppliers aswell as with the pharmaceutical and biotechnology industries we serve.  Oursales representatives are compensated through a combination of base salary,commissions, and bonuses based on quarterly and annual sales performance.  Inaddition, our pre-sales scientists, all of whom have Ph.D. degrees in chemistryor a closely related field, receive total compensation determined in part bytheir success in supporting and generating sales in a particular territory.

Teams, which includescientists working in collaboration with our sales employees, have developed aconsultative sales approach through which we have created relationships withour key customers.  We believe these relationships enable us to understand andbetter serve the needs of our customers.  Because our customers frequently haveboth domestic and international operations, our sales staff and scientists in foreignlocations work closely with their counterparts in the United States to ensurethat our customers' international needs are met in a coordinated and consistentfashion.

We market our workstation-basedsoftware products in a variety of ways, one of which is term licenses on thebasis of a fixed number of simultaneous users per software module. Network-based licensing is available, based on a count of the number ofsimultaneous users.  We also have time-based license options (one, two or threeyears) that offer customers the ability to tailor their product selections totheir specific research needs and that are renewable at the end of the selectedterms.  Our customer base has taken advantage of the flexibility of time-basedlicensing to access more of our software products.  These arrangements providea more predictable recurring revenue stream from the periodic renewals. Software packages consisting of modules typically purchased by customers inparticular industry segments have been defined and have been specially pricedto facilitate customer purchase of an optimal module set for their needs.

Discovery informaticsand software development arrangements are sold on a collaborative basis byfocused business developers and scientists directly to research management andinformation technology departments.  Each contract is negotiated based on theparticular software needs of the customer.  The term of the contract is highlyvariable and may range from a number of weeks up to multiple years.  Triposprovides programming and scientific expertise.  Discovery informatics contractsmay include specification, gap and risk assessment, and/or full biological andchemical data integration.  Our proprietary technologies such as Benchware 3DExplorer, Benchware Notebook, FormsBUILDER, SMART IDEA, AUSPYX and ChemCoreRIO,may be installed at a client site to solve many research information problems. These technologies have annual license fees.

Sales of the compound libraries,including LeadSelect libraries, are made through our sales teams anddistributors.  The LeadQuest library includes approximately 50,000 compoundsavailable for purchase.  The compounds are sold on a nonexclusive basis to allpurchasers and we generally retain no trailing rights to the compounds oncepurchased by a customer. LeadQuest high-throughput screening libraries arediverse, high-quality, drug-like compounds that serve as a pathway to moreextensive discovery research.

Discovery researchcollaborations, including LeadDiscovery, are offered through a team comprisedof business developers, scientists and members of senior management.  Thisapproach is best suited for the long cycle required in developing meaningfulpartnerships with key customers for LeadDiscovery programs, outsourcing orcollaborating on discovery research projects.

We exhibit our productsand services at various scientific conferences and trade exhibitions, includingnational and regional conferences of the American Chemical Society, at theInfoTech Pharma Conference, a variety of IBC Drug Discovery Conferences,Society for Biomolecular Screening Conference and CHI High-throughput Screeningfor Drug Discovery Conference and others.  Our scientists frequently publishand present results of original research at these and other conferencesthroughout the world.

* *

*Customer Training,Service and Support*

Software licensestypically provide a limited warranty for a 90-day period.  Thereafter, supportof our software products is provided under an annual fee arrangement. Approximately 90% of our commercial and academic customers have contracted forsupport service.  Thisservice gives customers access to telephone consultation with our technicalpersonnel in local offices, on-line access to a company-operated computerbulletin board, new release versions of licensed software if developed, andother support required to use our products effectively.

We offer customertraining in the use of our products through a dedicated training staffknowledgeable in both chemistry and computer science.  We send technicalnewsletters, bulletins, and advance notification about future software releasesto our customers to keep them informed and to help them with resourceallocation and scheduling.  We also sponsor seminars throughout the world forour customers, involving presentations both by our personnel and guestlecturers.  These seminars are designed to enhance customer understanding ofour products and their potential use as an aid to customer researchrequirements.  We provide our customers with advice on computer systemconfiguration management and also frequently provide customers with consultingadvice in addressing general application research questions as part of thenormal pre- and post-sales process.

** **

**Significant Customers**

** **

In 2005, 2004, and 2003,we obtained 46%, 54% and 52%, respectively, of our total revenues from Pfizer,Inc.  Our four- year $90 million file enrichment project with Pfizer wassuccessfully completed during December 2005.  No other individual customeraccounted for over 10% of total revenue in these years.

** **

**International Sales**

We sell softwarelicenses, compound products, and research services through our wholly ownedsubsidiaries in Canada and Europe and through a network of distributors andagents in the Pacific Rim, India, and South America.  Net sales from ouractivities outside of North America represented approximately 75%, 80%, and 74%of total net sales in 2005, 2004, and 2003, respectively, with Europeaccounting for 70%, 75% and 67%, and the remaining balances coming fromcustomers in the Pacific Rim.  We believe that revenues from foreign activitieswill continue to account for a significant percentage of our total net sales. See Note 23 to the consolidated financial statements, Segment Information,later in this Annual Report.

** **

Software license and compound product salesthrough distributors or agents to our Pacific Rim customers accounted for 5%**,**5%, and 7% of 2005, 2004, and 2003 total sales, respectively.  Softwareproducts and access keys are sent either directly to the customer or throughthe local representative firm.  For Pacific Rim transactions in all countriesexcept Japan and Taiwan, the end-user customer enters into software licenseagreements with Tripos.  Japanese and Taiwanese customers enter sub-licenseagreements with the local distributor.  All access keys are created by Triposupon receipt of proof of agreement (purchase requests from the Japanese andTaiwanese distributor or license agreements from end-user customers).  Revenueis recognized for all countries except Japan and Taiwan upon shipment ofproduct to the customer and when access is granted.  Revenue is recognized forJapanese and Taiwanese transactions upon shipment of product to thedistributor.  The Japanese and Taiwanese distributors are contractuallyobligated on a non-recourse basis for all software license transactions intheir territories.

**Research and Development**

We believe that our continuingposition as a leader in discovery informatics products and services will dependin large part on our ability to enhance our current product line, develop newproducts, maintain scientific and technological competitiveness, integratecomplementary third-party products, and meet a rapidly evolving range ofcustomer requirements.  We intend to continue to make substantial investmentsin product and technology development to meet our customers' demands.  

The complexity ofdeveloping new and enhanced scientific information management software in aclient/server environment is significant.  Delays or unexpected difficulties inany segment of a development project can result in late or undeliverableproduct.  In view of this complexity, there can be no certainty that we will beable to introduce our products on a timely basis in the future, or that our newproducts and product enhancements will adequately meet the requirements of themarketplace or achieve market acceptance.  

Our research anddevelopment activities are undertaken by our discovery software group and ourdiscovery research group.  The discovery software group, composed of chemistsand other scientists, works closely with customers to identify market needs fornew products.  Upon identification of a market need for a new product, thediscovery software group collaborates with our software engineers to developrequirements and specifications, implement code and perform regression testsfor the new product.  Separate quality assurance, environment management, andsystems groups manage the final release, documentation, and porting of the newproduct to all supported platforms. In some cases, we in-license softwaredeveloped by academic researchers for distribution as added modules in ourproduct line by Tripos. In addition, we fund research at certain academicinstitutions.  We believe that this funding allows us to gain access tosignificant technology not otherwise available.  Also, we enter into softwaredevelopment arrangements with major pharmaceutical customers to developsoftware tools crucial to high throughput research environments and for otheremerging issues in the life sciences industry.

In September 1998, weopened a temporary laboratory facility (6,600 sq. ft.) suitable for completechemical synthesis operations.  We began production of newly designed screeninglibraries, started pilot projects for contract research, and generated focusedlibraries.  In May 1999 we opened our second and larger laboratory facility(18,400 sq. ft.), providing us with the capacity to accommodate large librarysynthesis and contract research operations simultaneously.  Our compoundlibrary inventory, LeadQuest, has around 50,000 highly pure compounds availablefor sale.  In addition to LeadQuest library synthesis, we have the facilitiesand staff to perform multiple contract research projects concurrently.  Thelatest expansion of our chemistry facilities was completed early in 2004 andadded 48,000 sq. ft. of laboratory space to accommodate large-scale,high-volume production, as required under the recently completed Pfizercompound enrichment contract and other incremental business opportunities.  TheCompany now has approximately 68,000 square feet of laboratory space at itsdiscovery research center in Cornwall, England after retiring the initialtemporary laboratory at the end of 2005.

Research and developmentexpenses include all non-capitalizable costs of software development fromDiscovery Informatics and any non-capitalizable research associated with thevalidation of compound libraries or discovery research projects from ourDiscovery Research area.  R&D expenses for 2005, 2004, and 2003 were $10.9million, $9.3 million, and $12.9 million, respectively.  In accordance withStatement of Financial Accounting Standards No. 86 and AICPA Statement ofPosition 98-1, Tripos capitalizes software development costs for both externaland internal use.  Net capitalized software development balances were $2.3million at December 31, 2005, and $2.2 million at December 31, 2004. Thecapitalized software costs are related to the development of multiple new "benchtop"software technologies in our Benchware suite of products intended forlaboratory chemists.

A portion of ourchemistry R&D efforts are attributable to development of our LeadDiscoverypackages that include chemical compounds and associated intellectual propertyderived from biological screening activity.  We have captured the costs forpromising leads in inventory as we assemble the package offering.  Netcapitalized costs were $2.8 million at December 31, 2005, and $1.2 million atDecember 31, 2004.  Preliminary biological screening results show enriched hitrates that average over 24% activity compared to industry averages of 2% to 3%. We began marketing these packages in mid-2005.

** **

**Production**

Our Discovery Informaticssoftware production operations consist of assembling, packaging, shipping ofsoftware products (either by CD-ROM or electronically) along with documentationneeded to fulfill orders.  Outside vendors provide printing of documentationand manufacturing of packaging materials.  We typically ship our softwareproducts promptly after the acceptance of a customer purchase order and theexecution of a software license agreement.

Discovery Informaticsservice contracts, or enterprise software consulting, may be structured under avariety of terms including billing for hours worked, successful delivery ofmilestones, or fixed-price contracts.  Staff assigned to these contracts isprincipally located in the U.S.  These contracts may contain provisions forlicense fees on the core technologies delivered at the inception of the projector for the system software activated upon completion of the contract. Quarterly revenues and costs from software consulting will vary due to the mixof contracts being serviced in any particular quarter. 

Discovery Researchactivities and chemical compound production are performed and carried out atTripos Discovery Research in Bude, Cornwall, England.  Discovery researchprojects vary in size, scope and length of time to complete.  Discoveryresearch agreements may include technology access fees, full-time equivalentbilling rates, and trailing rights in the form of milestone payments orroyalties.  Under its research agreements, Tripos generally seeks to retain allrights to improvements to its pre-existing intellectual property during theproject.  Certain projects include management of biology screening processesperformed in-house or by third parties.  The unpredictability of chemistryreactions may impact the rate of progress on research contracts and lead tofluctuations in revenue recognition. 

We produce our LeadQuest chemical compounds inthe same laboratories as our discovery research activity using the samestate-of-the-art equipment and processes.  The LeadQuest compounds are createdfrom chemistry templates that do not overlap with customer-specific projects orthe LeadDiscovery sets.  All of our chemistry research and productionactivities rely on our patented and proprietary ChemSpace technology togenerate "drug-like" ideas from the trillions of potentialcandidates.

** **

**IntellectualProperty**

We license our workstation software through theexecution of license agreements with each customer.  We rely upon a combinationof patent, copyright, trademark, and trade secret laws to protect ourintellectual property.  License and non-disclosure agreements are used toestablish and protect the proprietary rights in our products.  We hold four keypatents in the area of analysis of the relationship of chemical structure toactivity: one issued in the early 1990's on our SYBYL CoMFA product, anotherissued in 1998 on our Hologram QSAR, and two on our ChemSpace technology issuedin 2001.  In addition, we have patents on our compound selection, librarydesign, and visualization technologies and on our pKA prediction methodology.

The source code for our products is protectedboth as trade secret and as unpublished, copyrighted work.  In addition, ourcore software products are developed and manufactured only at our facilities. We do not disclose the source code for our products to any of ourdistributors.  We supply our source code under special, restrictive licenseprovisions to a very limited number of customers only on special request, noneof which has been received in the last five years.  Also, upon request, Triposhas placed source code in escrow for the benefit of a minimal number ofdesignated customers for limited support purposes on a contingency basis.  Allmajor software products are shipped from our St. Louis facility under atechnical license management system that governs access.  Despite theseprecautions, it may be possible for a third party to gain use of our productsor technology without prior authorization, or to develop similar technologyindependently.  Effective copyright and trade secret protection may beunavailable or limited in certain foreign countries where we do business.  Themarkets in which we compete are characterized by rapid technological change. While we believe that legal protection of our technology is an importantcompetitive factor, we are aware that such factors as the technological andcreative skills of our personnel, new product development, frequent productenhancements, name recognition and reliable product support are important inmaintaining a sustained technology leadership position. 

We have a number of contracts with academicinstitutions and individuals providing us the right to license, market and usetechnology developed outside the company.  These products enhance our abilityto offer an enriched product line and represent a material percentage of ourannual revenue.

Our general screeningand targeted compound libraries and the related synthesis methods andapproaches, where proprietary, are protected as trade secrets by non-disclosureagreements and other means.  Compound, consulting, discovery research andcollaborative agreements we enter into require specific documentation regardingdefined proprietary rights, responsibilities of the parties, and/or allowed useof any related compounds or libraries of compounds.  During 2005, Tripossubmitted a number of patent applications for our LeadDiscovery collection.

**Competitors**

We operate in a highlycompetitive industry characterized by rapidly changing technology, frequent newproduct introductions and enhancements, and evolving industry standards.  Wecompete with other vendors of software products designed for applications inanalytical chemistry, computational chemistry, chemical information management,and combinatorial chemistry.  Our discovery research group competes withvendors around the world for the sale of contract chemistry research, focusedcompound libraries and diverse compound screening libraries.  The competitionin our industry is fragmented and populated with a wide spectrum oforganizations ranging from small start-up companies to large multi-nationalfirms along with academic research institutions. 

Competition is likely tointensify as current competitors expand their product offerings and as newcompanies enter the market.  The competition we experience in our existing andtargeted markets could result in price reductions, reduced margins and loss ofmarket share, all of which could have a material adverse effect on us.  Anumber of our existing competitors have significantly greater financial,technical and marketing resources than we do, in addition to access to lowercost off-shore labor.  We believe that the principal factors affectingcompetition in our markets are product quality, performance, reliability,scientific and technological innovation, ease of use, technical service,support, and price.  We expect that these factors will remain major competitiveissues in the future, but additional factors will become increasinglyimportant, including contribution to the overall efficiency of the researcheffort through enhanced integration, communication and analysis.  Although webelieve that we currently compete favorably with respect to these factors,there can be no assurance that we will be able to compete successfully againstcurrent and future competitors or that the competitive pressures we face willnot have a material effect on our business, operating results, or financialcondition.

** **

**Employees**

As of December 31, 2005, we hada total of 327 employees, of whom 143 were based in the United States and 184 were based internationally.  Of the total, 61 were engaged in marketing, salesand related customer-support services, 71 in software product development andconsulting services, 136 in chemistry laboratory activities and 59****inoperations, administration, MIS and finance.  In December 2005 we announcedthat we were initiating a process to streamline our Discovery Researchorganization in Bude, England due to a sharp decline in contracted revenue, aresult of the successful completion of our four-year contract with Pfizer. Weinitiated the 30-day consultation period with our employees as required by UK law on December 19, 2005, and completed the reduction in force of 76 positions onJanuary 24, 2006. Of the 76 positions made redundant, 70 were engaged inchemistry laboratory activities and the remaining 6 in operations,administration, MIS, and finance.  Our future success is significantlydependent on the continued service of our key technical and senior managementpersonnel and our continuing ability to attract and retain highly qualifiedtechnical and managerial personnel.  None of our employees are represented by alabor union nor covered by a collective bargaining agreement.  We have notexperienced any work stoppages.

** **

**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 the Company's annual report will bemade available, free of charge, upon written request.

**Part****IA.****  Risk Factors**

** **

Our future results coulddiffer materially from those discussed in this Annual Report.  Factors thatcould contribute to such differences, include, but are not limited to, thefollowing:

*Company Risk Factors*

We face uncertainty inhaving the access to capital that may be necessary to fund our operations.  We recently received acommitment to amend and extend our bank line of credit facility with LaSalleBank so that this facility will now mature on January 1, 2007.  If we areunable to further extend this credit facility or to obtain additional fundingfrom other sources on acceptable terms, we could face difficulties in fundingour operations after January 1, 2007.

We face uncertainty inour pursuit of strategic alternatives.  In January 2006 we announced the retention ofa financial advisor to assist our Board of Directors in considering variousstrategic alternatives for the Company, including mergers and acquisitions,becoming a private company, and separating our informatics and researchbusinesses.  We are currently in the process of identifying possible strategicalternatives, contacting possible parties with whom we might pursuediscussions, and in some cases engaging in preliminary discussions.  We have noobligation to comment on further developments unless and until we enter into adefinitive transaction.  The ability to structure and complete any strategic transactionis uncertain and subject to considerable risks, many of which are outside ofour control.

We derive a significant portion of our revenuesfrom a limited number of large customers.  We seek to enter into large, multi-yearcontracts with large pharmaceutical companies and biotechnology companies.  Itis difficult for us to predict when contracts of this nature will be awarded orthe terms of these contracts.  In addition, the terms of these contracts maypermit the customer to terminate the contracts or reduce their requirements. We may not always be in a position to adjust utilization of our resources tothe needs of one or more of these large-contract customers.  In 2005, wesuccessfully completed a four-year $90 million contract with Pfizer, Inc.  Todate, we have not been able to replace this business with other similarbusiness from one or a number of customers.

We may experiencesignificant fluctuations in our quarterly operating results as a result ofuncertainties relating to our ability to generate additional revenues, manageour expenditures and other factors, certain of which are outside are control.  We have historicallyexperienced fluctuations in our quarterly results.  Quarterly operating resultsmay continue to fluctuate as a result of a number of factors, including lengthysales cycles, market acceptance of new products and upgrades, timing of newproduct introductions, changes in pricing policies, changes in general economicand competitive conditions, seasonal slowdowns, and the timing and integrationof acquisitions.  We also expect to continue to experience fluctuations inquarterly operating results due to general and industry specific economicconditions that may affect the research and development expenditures ofpharmaceutical and biotechnology companies.  Due to the possibility offluctuations in our revenues and expenses, we believe that quarter-to-quartercomparisons of our operating results are not a good indication of our futureperformance.

Our business andoperating results could be adversely affected by our inability to accuratelyestimate the revenue or costs on a contract.  We seek to enter into long-termcontracts with our customers, which generally are accounted for on apercentage-of-completion basis.  This methodology requires the ability toaccurately estimate total costs to be incurred in order to match revenuesaccordingly.  If we are unable to accurately estimate the costs of theseprojects, we may be required to defer costs and revenues on these contractsuntil milestone delivery events are achieved (costs are assured). Profitability on these contracts may be driven by the extent of utilization ofour billable personnel and our ability to control project costs.  Accountingfor a contract requires judgment relative to assessing the contract's estimatedrisks, revenue and costs, and on making judgments on other technical issues. Due to the size and nature of many of our contracts, the estimation of overallrisk, revenue and cost at completion is complicated and subject to manyvariables.  Changes in underlying assumptions, circumstances, or estimates mayalso adversely affect future period financial performance.

We cannot be certainthat our sales strategy will be effective in achieving additional sales of ourproducts. Our strategy  is to focus specific selling resources on promoting thetraditional computational chemistry offerings, a second group focused onlaboratory informatics solutions, and a third group whose role is to pursuechemistry research projects.  We believe this focused approach allows our salesforce to leverage its existing knowledge base most effectively in sellingdiscovery software, laboratory informatics and discovery research.  We cannotbe certain that our sales force will be properly allocated to the respectivedisciplines and be able to make additional sales.  There can be no assurancethat the market will accept our approach, or that competitors will not offerother approaches that gain greater scientific, technological, or marketacceptance.

We may incur significant costs in protecting ourintellectual property rights or responding to claims of infringement fromothers. Our success will depend, in part, on our ability to obtain and enforce patents,protect trade secrets, and copyrights, enforce restrictive licenses granted tothird parties, obtain licenses to technology owned by third parties whennecessary or developed in collaboration with us, and conduct our businesswithout infringing the proprietary rights of others.  We currently rely upon acombination of trademark, patent, copyright and trade secret laws, employee andthird party non-disclosure agreements and other contracts to protect ourproprietary rights.  Nevertheless, our efforts to protect our intellectualproperty may be inadequate and we may be unable to prevent others from offeringproducts and services substantially similar to ours.  We also need to secureand maintain adequate protection of our intellectual property outside of the United States because our sales are global.  The laws of some foreign countries do notprotect proprietary rights to the same extent as the laws of the United States, and many companies engaging in international business have encounteredconsiderable difficulties in safeguarding their proprietary rights in foreignjurisdictions. Also, United States and European patent law related to certaintypes of inventions continues to be debated and may be subject to change. Certain changes could have an adverse impact on our strategy.    

Moreover, third parties may claim that ourcurrent or future products or services infringe upon their intellectualproperty.  Litigation over these issues could be a significant distraction andwe may incur significant costs, including damages.  In the event that it isdetermined that one of our products infringe upon another's proprietary rights,we may be required to obtain a license in order to continue selling ourproducts or develop a non-infringing alternative because a license may not beavailable to us on favorable terms, or at all.

Our business isdependent upon the extent to which pharmaceutical and biotechnology companiescollaborate with drug discovery companies for one or more aspects of their drugdiscovery process.*If we are unable to enter into joint venture or collaborative arrangementswith third parties, our business would suffer.* Our commercial successdepends on our ability to enter into joint venture or other collaborativearrangements with third parties.  To date, we have entered into numerous sucharrangements with large pharmaceutical companies and emerging biotechnologycompanies.  There can be no assurance that we will be able to continue toestablish these collaborations, that any such collaborations will be onfavorable terms, or that current or future collaborations will ultimately besuccessful.  

Our ability to convincepharmaceutical and biotechnology companies to use our drug discoverycapabilities, rather than develop them internally, will depend on many factors,including our ability to:

>   providescientists and technologies that are of the highest caliber;

>   developdrug discovery technologies that will result in the identification of higherquality drug candidates;

>   achieveexpected results within our customers' timeframes, meeting quality and costguidelines; and

>   design,create and manufacture sufficient quantities of our chemical compounds for ourcustomers.

Even if weare able to address these factors, these customers may nevertheless determineto perform these activities internally or with other companies that provideservices similar to ours.

If we fail to retain ourkey personnel, our ability to operate our business may be adversely affected.  Our future successdepends to a significant degree upon the continued service of key seniormanagement personnel, in particular, our President and Chief Executive Officer,Dr. John P. McAlister, as well as key technical personnel within theinformatics and chemistry operations.  We believe that Dr. McAlister'sreputation and prominence in the field provide us with a competitiveadvantage.  None of our key personnel is bound by an employment agreement orcovered by an insurance policy where Tripos is the beneficiary.  The loss ofone or more key members could have a material adverse effect on our businessand results of operations. 

Failure to attract andretain the experienced scientists we need to compete in our industry may affectour business. We compete with the research departments of pharmaceutical companies,biotechnology companies, combinatorial chemistry companies, contract researchcompanies and academic institutions for new scientific personnel.  We competewith consulting companies for experienced computer programmers to carry out oursoftware consulting contracts.  We cannot be assured that we will continue tobe successful in attracting and retaining qualified personnel should theworldwide demand for these skilled individuals increase.  We believe that thereis a shortage of, and significant competition for, scientists with the skillsand experience in the sciences necessary to perform the services we offer.  Inaddition, our inability to hire additional qualified personnel may require anincrease in the workload for both existing and new personnel.  We may not besuccessful in attracting new scientists or sales personnel or in retaining ormotivating our existing personnel.

Our common stock has experienced, and maycontinue to experience, price volatility, and a low trading volume.  The market price ofour stock has been and is likely to continue to be highly volatile. Furthermore, the stock market generally and the market for stocks of companieswith lower market capitalizations and small companies like Tripos, have fromtime to time experienced and likely will again experience significant price andvolume fluctuations that are unrelated to the operating performance of aparticular company. 

Our common stock has experienced low tradingvolume in the past and as a direct result has been and may continue to besubject to large fluctuations.  Our common stock price may increase or decreasein response to a number of additional events and factors, including:

>   trendsin our industry and the markets in which we operate;

>   changesin the market price of the products we sell;

>   theintroduction of new technologies or products by us or our competitors;

>   changesin expectations as to our future financial performance, including financialestimates by securities analysts and investors;

>   operatingresults that vary from the expectations of securities analysts and investors;

>   announcementsby us or our competitors of significant contracts, acquisitions, strategicpartnerships, joint ventures, financings or capital commitments;

>   changesin laws and regulations; and

>   generaleconomic and competitive conditions.

The large number of shares of common stockeligible for future sale could depress our stock price.  If shareholders sell asubstantial number of shares of our common stock in the public market, orinvestors become concerned that substantial sales might occur, the market priceof the common stock could decrease.  Such a decrease could make it difficultfor us to raise capital by selling stock or to pay for acquisitions usingstock.  To the extent outstanding options or warrants are exercised oradditional shares of capital stock are issued, investors purchasing our stockmay incur additional dilution.

If shareholders do not receive dividends,shareholders must rely on stock appreciation for any return on their investmentin us. We have not declared or paid cash dividends on any of our capital stock.  Wecurrently intend to retain earnings for future growth and therefore do notanticipate paying cash dividends in the future.  If we issue shares ofpreferred stock, the holders thereof may have preferential rights.  As aresult, only appreciation of the price of the common stock will provide areturn to investors.

*Industry Risk Factors*

We face the pressures ofan extremely competitive market, and our business would suffer if we are unableto effectively compete.  We compete globally with the research departments ofpharmaceutical companies, biotechnology companies, combinatorial chemistrycompanies, contract research companies, and research and academic institutionsin size, relative expertise and sophistication, speed and costs of identifyingand optimizing potential lead compounds and of developing and optimizingchemical processes.  These competitors may have greater financial and otherresources, and access to low-cost offshore staffing along with more experiencethan we have in certain research and development methods.  In addition,internal departments of corporations may be resistant to outsourcing softwaredevelopment and/or chemical research, because it could reduce thosedepartments' budgets or because their intellectual property groups may becomemore resistant to outsourcing.  Moreover, in the future our competitors mayoffer broader product lines or technologies or products or expertise that aremore commercially attractive than ours, either current or future, or that mayrender our technologies, expertise, or products obsolete.

Our current and potentialcustomers consist primarily of pharmaceutical and biotechnology companies,which presents risks that could affect our ability to sell our products. Wehave benefited in the past from the increasing trend among pharmaceutical andbiotechnology companies to outsource chemical research and developmentprojects.  However, our customers capital spending plans and decisions tooutsource the work we offer has tended to be cyclical in nature despite ageneral trend favoring outsourcing. A reversal or slowing of this trend, ashift in customer's preferred partner expertise, or a general economic downturnin these industries could have a material adverse effect on our business,financial condition and results of operations.  Thus, our ability to generate revenueis subject to risks and uncertainties that could cause reductions and delays inresearch and development expenditures within our industry.  These risks anduncertainties are not within our control.  In addition, further consolidationin the pharmaceutical and biotechnology industries will reduce the number ofour potential customers, and may adversely affect our future revenues.  If oneof the parties to a consolidation uses the products or services of one of ourcompetitors, we may lose existing customers as a result of such consolidation.

Pharmaceutical andhealth care reform could reduce the amounts that pharmaceutical andbiotechnology companies have available to retain our services.  We expect thata substantial portion of revenues in the foreseeable future will be derivedfrom services provided to the pharmaceutical and biotechnology industries.  If regulatoryor legislative proposals or reforms are adopted that have a material adverseeffect on the businesses, financial condition, and results of operations ofpharmaceutical and biotechnology companies that are Tripos; existing orprospective customers, our business, financial condition, and results ofoperations could be materially and adversely affected as well.  For example,future legislation could limit the prices pharmaceutical and biotechnologycompanies can charge for the drugs they market. This would have the effect of reducing theresources that these companies can devote to the research and development ofnew drugs, which would in turn reduce the amount of services that we performand our resulting revenues.

** **

**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 is financed by amortgage note.  We lease a small office space in Austin, Texas for additionalsoftware development activity.  Tripos also owns laboratory facilities (68,000square feet) in which chemical product development and discovery researchservice contracts are executed located in Bude, Cornwall, England.  Our European subsidiaries lease sales and service offices in the United Kingdom, France, and Germany.  We believe that our existing facilities are adequate for ourcurrent needs and that additional space will be available as needed.

** **

**Item 3.  LegalProceedings**

*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 alleges 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 names 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 is $3.15 million which is to be paid by our insurers.  Thesettlement is subject to court approval after notice and an opportunity toobject is provided to the putative shareholder class.  There can be noassurance that the settlement will be approved in which event, we will continueto defend ourselves against these claims vigorously.  

 

*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 alleges 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 verbalagreement to settle this litigation, subject to final documentation and courtapproval, involving the implementation of certain policies and procedures bythe Company and the payment of attorneys' fees of $200,000 to plaintiffs'counsel.  All fees are to be paid by our insurers.  There can be no assurancethat the settlement will be approved in which event, we will continue to defendourselves against these claims vigorously.  

**Item 4.  Submissionof 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, 2005.

 

**Part II**

** **

** **

**Item 5.    Market for Registrant's Common Stockand Related Shareholder Matters**

Tripos' common stock trades onThe NASDAQ National Market System under the symbol "TRPS".  Thefollowing table sets forth the range of the high and low sales prices per shareof the common stock for the fiscal quarters indicated, as reported by NASDAQ.Quotations represent actual transactions in NASDAQ's quotation system but donot include retail markup, markdown, or commission.

| ** **     | 2005  | ** ** | 2004 |
|----------------|-------|------------|------|
|                | High  | Low   |      | High | Low  |
| First quarter  | $5.61 | $3.92      |      | $7.20 | $4.50 |
| Second quarter | $4.84 | $3.38      |      | $6.59 | $4.55 |
| Third quarter  | $4.70 | $3.30      |      | $5.58 | $3.51 |
| Fourth quarter | $4.42 | $2.40      |      | $5.75 | $3.40 |

We had approximately 800shareholders of record and 2,800 beneficial holders as of December 31, 2005. 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 addition, our credit facilities with LaSalle Bank N.A. restrict thepayment of dividends to shareholders.

**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**                                  | **12-31-05**            | 12-31-04            | 12-31-03            | 12-31-02            | 12-31-01 |
| In thousands, except per share amounts                                      | ** **              |                     |                     |                     |  |
| *Net Sales:*                                                                |                         |                     |                     |                     |  |  |
|      Discovery  informatics products & support | **$24,857 **       | $ 24,639  | $ 23,702  | $ 22,182  | $ 20,070 |
|      Discovery  informatics services               | **3,076 **         | 4,005          | 3,241          | 7,956          | 10,488 |
|      Discovery  research products & services   | **27,440 **        | 36,004         | 26,245         | 18,016         | 12,024 |
|      Hardware                                      | **48 **            | 131            | 960            | 937            | 3,514 |
|         Total  net sales            | **55,421 **        | 64,779         | 54,148         | 49,091         | 46,096 |
| *Cost of sales*                                                             | **29,342 **        | 32,752         | 26,240         | 20,601         | 15,235 |
| *Gross profit*                                                              | **26,079 **        | 32,027         | 27,908         | 28,490         | 30,861 |
| *Operating expenses:*                                                       | ** **              |                     |                     |                     |  |
|      Sales  and marketing                          | **10,666 **        | 12,560         | 13,195         | 15,476         | 12,007 |
|      Research  and development                     | **10,866 **        | 9,294          | 12,917         | 10,102         | 8,904 |
|      General  and administrative                   | **7,696 **         | 7,771          | 7,241          | 6,886          | 7,506 |
|      Restructuring  charge                         | **861 **           | --        | --        | --        | --  |
|         Total  operating expenses   | **30,089 **        | 29,625         | 33,353         | 32,464         | 28,417 |
| Income (loss) from  operations                                              | **(4,010)**             | 2,402          | (5,445)             | (3,974)             | 2,444 |
| Other income (expense), net                                                 | **(2,348)**             | (160)               | 9,114          | 3,419          | 2,210 |
| Income (loss) before income  taxes                                          | **(6,358)**             | 2,242          | 3,669          | (555)               | 4,654 |
| Income tax expense  (benefit)                                               | **2,070 **         | 2,010          | 1,569          | (587)               | 1,563 |
| Net income (loss)                                                           | **(4,288)**             | 232            | 2,100          | 32             | 3,091 |
| Preferred dividends                                                         | --                 | --             | --             | 37             | 450  |
| Net income (loss) allocable  to common shareholders                         | **$ (4,288)**      | $ 232     | $ 2,100   | $ (5)          | $ 2,641 |
|                                                                             | ** **              |                     |                     |                     |  |
| Basic earnings (loss) per  share                                            | **$ (0.42)**       | $ 0.03    | $0.23          | $(0.00)             | $0.36 |
| Basic weighted average  number of shares                                    | **10,096 **        | 9,206          | 8,949          | 8,615          | 7,369 |
| Diluted earnings (loss) per  share                                          | **$(0.42)**             | $ 0.02    | $0.23          | $(0.00)             | $0.33 |
| Diluted weighted average  number of shares                                  | **10,096 **        | 9,357          | 9,333          | 8,615          | 9,441 |
| * *                                                                    |                         |                     |                     |                     | ** ** |  |
| ** **                                                                  | * *                |                     |                     | ** **          |  |
| **Consolidated Balance  Sheet Data**                                        | *(at year end)*         |                     |                     | ** **          |  |
| Working capital (deficit)                                                   | **$(3,068)**            | $(3,077)            | $ 744     | $ 12,625  | $ 15,692 |
| Total assets                                                                | **66,816 **        | 73,122         | 71,695         | 62,971         | 58,618 |
| Long-term obligations, less  current portion                                | **7,234 **         | 2,653          | 6,378          | 7,382          | 3,067 |
| Series B preferred stock                                                    | **--  **      | --             | --             | --             | 9,826 |
| Total shareholders' equity                                                  | **$ 29,513 ** | $ 27,866  | $ 26,994  | $ 30,324  | $ 19,348 |

**Item7.    Management's Discussion and Analysis of Financial Condition and Resultsof 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**

** **

Tripos provides products and services to thepharmaceutical, biotechnology, and life science industries to support earlystage research activities.  Sales to the pharmaceutical industry represent 83%of all new contracts sold during 2005.  Tripos offerings are appliedprincipally to assist research chemists to make decisions about the mostproductive new compounds to make and test as potential therapeutics.  Throughits own chemistry laboratories, Tripos can also make those compounds for itsclients.  Through strategic partnerships, Tripos can also participate moredirectly with its clients in the development and testing of new therapeuticcompounds for its clients.

The industries that Tripos serves are highlyresearch-driven.  Mature pharmaceutical companies typically spend between 12%and 20% of their annual revenues on research in the search for new blockbusterdrugs.  This research process consists of several phases:  from early discoveryof compounds of interest, through testing of the promising ones for activityand safety in animals, to final testing of these compounds in humans.  Theinvestment in the research activity increases dramatically in the second andthird phases of the research activity.  Tripos offerings are most relevant tothe initial phase of this activity.  Our products and services are designed andintended to provide our pharmaceutical and biotechnology customers withimproved ways to identify and select the most promising drug candidates to takeforward into the more expensive and time consuming stages of the drugdevelopment process.   Depending on the number of compounds that a particularcompany has in different stages of their new therapeutic pipeline, they mayreduce or increase investment in the other phases of research.  Further,decisions by the pharmaceutical industry concerning their research investmentsare strongly influenced by decisions by the various governments of the worldabout drug pricing and regulation.

Tripos software products are primarily sold on arenewable license basis, typically with terms of one to three years.  Thisbusiness is generally predictable, as we have experienced high renewal rates inthe past for licenses.  Tripos management closely monitors license expirationsand deploys sales staff to ensure the highest probability of renewals.  Tripos'service businesses, both informatics and chemistry, are much less predictable. The sales cycles for these offerings are typically long -- from six months toeighteen months -- and are highly influenced by factors in the macro-economicenvironment, including the general state of the pharmaceutical industry and thepolitical situations in various parts of the world.  To forecast potentialbusiness in these areas, Tripos management strives to closely interact with themanagement of our customers and is closely involved in business developmentactivities for service projects.

Large service contracts for pharmaceuticalresearch, both informatics and chemistry, are complex and, because they aredeployed in research applications where outcomes are uncertain, have a largerisk component.  Risk management in these projects begins with the definitionof project requirements and continues through performance metrics and customeracceptance milestones.  Due to the complexity of the projects and changingpriorities within client organizations, it is typical that many decision pointswill arise that require management attention both at Tripos and at the client. To mitigate the project difficulties, Tripos has developed a focused process inwhich management monitors milestones in the project plan according to theprocess workflow.  Despite best efforts, however, some projects are ofsufficient complexity that they present challenges that require revisions tothe project plan and scope. 

Having been a public company spinout in 1994with limited capital, we have focused on profitability and cashflow.  Thatsaid, we have not always been profitable, but have achieved profitability incertain years.  Major investments, such as the recent expansion of ourchemistry research laboratories in England, have been funded by othersuccessful investments (e.g. Arena Pharmaceuticals), cash from operations,temporary use of debt capacity, and grant funding from the British government.

**Item 7.    Management'sDiscussion and Analysis of Financial Condition and Results of Operations(continued)**

We generate revenuesfrom a diversified offering of products and services.  We derived 45% of our2005 revenues, 38% of our 2004 revenues, and 44% of our 2003 revenues from DiscoveryInformatics products and support, 6% of 2005, 2004, and 2003 revenues from DiscoveryInformatics services, and 49% of 2005 revenues, 56% of 2004 revenues, and 48%of 2003 revenues from Discovery Research products and services.  The remainderis from hardware sales. 

We license our DiscoveryInformatics products and post-contract support ("PCS") as eitherperpetual licenses or time-based licenses, typically one to three-yearrenewable contracts.  The magnitude of these license fees is dependent on eachcustomer's required usage levels, that is, the number of locations and individualusers.  Variations in licensing levels range from the low hundred-thousands upto several million dollars.  The following are descriptions of our currentsales models for discovery software:

**Perpetual licenses:**

Software pricing istaken from our price list based on the quantity of individual modules andnumber of users.  Customers are billed upon delivery.  Revenue for software isrecognized upon delivery of product and issuance of perpetual keys.  PCS isoptional for each customer and is priced as a fixed percentage of the totalcurrent list price of the software purchased. Where applicable, PCS istypically billed annually.

The Company has analyzedthe other elements included in its multiple element arrangements involvingperpetual licenses, and has determined it has sufficient Vendor SpecificObjective Evidence ("VSOE") to allocate revenues to PCS and/ortraining.  VSOE for PCS and training is established based on the price chargedwhen those elements are sold separately.  For PCS, this allocation amount is establishedbased on the renewal rate specified in the arrangement, which is consistentlypriced at a percentage of the list price of the purchased licenses.  Trainingis charged consistently from the Company's price list. 

**Bundled licenses:**

Time-based bundledlicenses are an alternative to perpetual licenses.  This type of license allowsour customers to obtain multiple software products bundled with PCS that isco-terminus with the period of the arrangement (typically 3 years).  A bundledlicense includes specific software modules and specified numbers of users ofeach module with all product and access keys delivered on or before theeffective date of the contract.  Tripos software is sold to professional userson an "off the shelf" basis in which the customer is responsible forinstallation.  These non-cancelable, non-refundable contracts are normallythree years in duration although certain customers request shorter or longercontract periods.  At the end of the contract term, the customer must renew thelicense, or the software will cease to operate.  PCS, which includesunspecified updates, upgrades, and "help desk" services, is includedin the total price of the contract.  The PCS provided under bundledarrangements is the same as that provided to customers under perpetualagreements.  Bundled contract pricing is taken from our established price list(includes package pricing and a-la-cart pricing) that is based on the number ofusers and length of term.  All contracted products are delivered at inception. If the customer should want additional modules, users, or license to any newsoftware products, the customer must enter a new contract (or addendum) and paythe incremental fees to purchase these items.  Software revenue and PCSrevenues under bundled license agreements are recognized ratably over thecontract period.

**Term licenses:**

Term Licenses representone-year arrangements for a software product and one-year of PCS.  The price istaken from the Company's price list by product.  The support renewal fee is afixed percentage of the software price (similar to perpetual model).  The PCSprovided for under term arrangements is the same as that provided to customersunder perpetual agreements.  Software and support pricing are separately statedand billed upon delivery of product.  To continue to operate the software, thecustomer must pay their annual renewal fee.  Software revenue and PCS revenuesunder term license agreements are recognized ratably over the contract period.

Our integration ofchemistry and biological data in the life sciences industries creates a revenueopportunity for discovery informatics services (software consulting).  To servethis market, we maintain a staff of specialists who use our proprietary dataintegration framework, such as MetaLayer, FormsBuilder, SMART-IDEA, BenchwareNotebook, ChemCoreRIO and AUSPYXTM to configure customized solutionsfor data management.  Revenue may be generated on a billable rate per day, orupon achievement of milestones or deliverables and is recognized as productionactivities are performed.  These contracts may also generate substantiallicense fee revenue for our proprietary software 

**Item 7.    Management'sDiscussion and Analysis of Financial Condition and Results of Operations(continued)**

technologies.  As withour discovery informatics products, licensing levels may range from the lowhundred-thousands up to the million dollar levels.

We develop andmanufacture general screening compound libraries for sale to the life sciencesindustry for a fee per compound delivered.  In addition we offer ourLeadDiscovery libraries which include of higher value intellectual propertyrights (such as patent applications).  These compounds and libraries havecreated the opportunity to offer follow-up discovery research methods tocustomers for design and synthesis of focused libraries for lead optimization. We also market a comprehensive research process to our life sciences customersfor rapid and cost effective discovery.  This process combines advanced informatics,chemistry, and biology products and services, and proprietary discoverytechnologies for efficient lead development, refinement, and optimizationresulting in a tightly integrated process to facilitate synergies in drugdiscovery. 

In the past we have actedas a reseller of computer hardware.  Hardware sales are generally made tofacilitate our software customers' access to hardware components and not aprimary focus of our sales activities.  We act as an authorized reseller andonly order hardware products on an "as needed" basis, and thus do notmaintain any inventory.

We license discoveryinformatics tools to customers, provide ongoing support (including upgradesselected by customers) and provide informatics services to customers thatenable integration of our existing and newly developed discovery tools tocustomers' discovery operations.  We generally expense research and developmentcosts associated with software enhancements and new functionality.  Thus, asignificant portion of the costs associated with development and enhancement ofsoftware is accounted for as research and development and not as a cost ofsoftware sales.  Certain software development projects require substantialcommitments of time and resources.  Costs of these projects are capitalizedupon achievement of technological feasibility and/or a working model accordingto the Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards("SFAS") No. 86.  

Quarterly expensesinclude the fixed costs of research and development for software developmentand new chemistry research.  We believe that core selling and administrativecosts will remain generally consistent on an annual basis.  Variability inquarterly expenses primarily occurs in relation to the level of revenues.  Thisis due to sales compensation, bonuses, staffing for selling, general andadministrative functions and for periodic marketing activities such asappearances at trade exhibitions.  The relationship between the quarterlyamounts presented for cost of sales or research and development expense mayfluctuate based on the utilization of our employees on either billablecontracts or research projects.

Our revenues and expenses varyfrom quarter to quarter depending upon, among other things, the timing ofcustomers' budget processes, the success of our sales efforts, the lengthysales cycle and our ability to influence customers and prospective customers tomake decisions to outsource portions of their discovery process, the size of thecustomers' capital expenditure budgets, the ability to produce compoundlibraries and achieve product release schedules (including by Tripos' thirdparty software providers and collaborators)  in a timely manner, the rate of marketacceptance of new products and enhanced versions of existing products, thetiming of new product introductions by us and other vendors, changes inlicensing and pricing policies (ours, our partners and that of other vendors),consolidation in the customer base, client involvement in decision points incontracts related to project plans, our ability to accurately match contractcosts to milestone or contract performance requirements on our largercollaborative arrangements, and changes in general economic, regulatory, andcompetitive conditions.  See Note 1 of the Notes to Consolidated FinancialStatements for a discussion of revenue recognition policies.  Because much ofour software license and PCS revenue along with our contracted discoveryresearch revenue is recognized ratably over multiple periods, fluctuations inour quarterly revenues and earnings are caused principally by sales ofcompounds or by achievement of milestones on specific projects.  Our managementteam monitors quarterly business activity with the aid of sales pipelinereports and monthly financial reports.

** **

**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.

** **

**Item 7.    Management'sDiscussion and Analysis of Financial Condition and Results of Operations(continued)**

** CriticalAccounting Policies (continued)**

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

**Discovery InformaticsProducts and Support**

The Company recognizesrevenues in accordance with the American Institute of Certified PublicAccountants (AICPA) Statement of Position (SOP) 97-    2,     "Software RevenueRecognition," as amended.  Revenues from software license agreements arerecognized when each of the following criteria are met as set forth inparagraph 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 allocatesrevenues on perpetual software arrangements involving multiple elements to eachelement based on the relative fair values of each element.  The Company'sdetermination of fair value of each element in multiple element arrangements isbased on vendor-specific objective evidence (VSOE).  The Company limits itsassessment of VSOE for each element to the price charged when the same elementis sold separately by the Company.  The Company has analyzed all of theelements included in its multiple-element arrangements and determined that ithas sufficient 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.

Software maintenanceagreements provide technical support and the right to unspecified enhancementsand upgrades on a "when-and-if-available" basis.  Post-contractcustomer support revenues on perpetual agreements are recognized ratably overthe term of the support period (generally one year), and training and otherservice revenues are recognized as the related services are provided.  Anyunrecognized portion of amounts paid or billed in advance for licenses andservices is recorded as deferred revenue.  Revenues from post-contract supportare derived from sales to new customers and renewals from existing customers. Historical renewal rates have averaged in excess of 90%.

Term and bundledlicenses represent time-based license arrangements for one or multiple softwareproducts that are sold with maintenance and support for the term of the licensearrangement.  The Company does not have VSOE to determine fair value of themaintenance and support in term arrangements.  The Company recognizes revenuesfrom these bundled time-based licenses ratably over the license term, which istypically 1 to 3 years.  Revenues from time-base license arrangements arederived from sales to new customers and renewals from existing customers. Historical renewal rates have averaged over 80% the past three years.

**Discovery InformaticsServices**

Discovery InformaticsServices (DIS) represents contracts for the development and delivery ofenterprise-wide customized software (such as laboratory information systems ordatabase integration projects).  Technological feasibility exists on thesesoftware arrangements and they typically include installation at the customer'ssite.  We account for these arrangements in accordance with SOP 81-1, asrequired by SOP 97-2 since the contract to deliver software and installationrequires significant production, modification or customization of software.

In applying theprovisions of SOP 81-1 the percentage of completion is utilized.  For contractswhere customer approval of contractually required tasks must occur at eachdistinct milestone, and where amounts billable are indicative ofprogress-to-completion, we record revenues when a milestone has been met andaccepted by the customer.  For contracts without distinct milestones, wemeasure progress using the cost-to-cost method (cumulative costs as apercentage of total expected costs to complete), which approximates progresstowards completion.

**Item7.    Management's Discussion and Analysis of Financial Condition and Resultsof Operations (continued)**

** **

**CriticalAccounting Policies (continued)**

DIS also includessoftware development ("SD") projects that are contractualarrangements with customers for use of Tripos software developers in an effortto develop a scientific software tool for use in drug discovery.  Thecontractual arrangements are on a "commercially reasonable" basis,and the customer is subject to billings on a time and materials basis. Accordingly, we record the related revenue when the time and costs are incurredat the stated contractual rates.

**Discovery ResearchProducts and Services**

Discovery Research salesinclude sales of chemical compounds from (1) inventory, (2) long-term contractsto design and produce chemical compounds to customer specifications, or (3)contracts to perform discovery research activities. 

Tripos recognizes revenuefrom the sale of chemical compounds upon shipment of the products, FOB shippingpoint, to the customer.  This practice is consistent with the four criteriarequired for revenue recognition listed in paragraph 1 of Staff AccountingBulletin ("SAB") 101 issued by the U.S. Securities and ExchangeCommission ("SEC").  For chemical compound transactions, persuasiveevidence of an agreement exists upon the receipt of a contract outlining thepurchase and usage terms of the compounds.  A purchase order may also bereceived as confirmation.  As stated above, revenue is not recognized until thecompounds have been shipped to the customer.  The selling price for compoundsis fixed according to the terms of the contract or customer's purchase order. Payment terms for chemical compound transactions are Net 30 days.  The Companyhas experienced very few bad debts arising from these product transactions; asa result, collectibility is reasonably assured.

In accordance with SOP81-1, sales derived from long-term contracts to design and produce chemicalcompounds to customer specifications are recorded using the percentage ofcompletion method as the compounds are delivered (under the units of deliverymethod).  The contract costs related to delivered compounds are recorded tocost of sales as the compounds are delivered and revenue is recognized.

Discovery Researchactivities involve lead compound optimization projects, custom synthesis, andcompound design.  These contracts generally call for non-refundable contractualfees tied to time and materials.  Accordingly, revenues under contracts of thistype are recorded on a time and material basis.  When contracts to performdiscovery research activities require a specific deliverable, the direct andincremental contract costs are deferred.  Revenue and the contract costs arethen recorded upon delivery and acceptance.

An access fee for ourLeadDiscovery programs is recognized upon completion of a materials transferagreement and shipment of selected compounds to the customer for screeningpurposes.  Should the customer decide to retain exclusive rights to promisingcompounds in the selection, an additional fee is required.  Customers mayengage Tripos for discovery research services to further refine the leadcompound for additional fees. 

** **

**Hardware Sales**

Hardware sales arerecorded upon delivery unless delivered in connection with a contractualarrangement involving term or bundled software licenses.  When hardware is soldin conjunction with a term or bundled license, the entire contractual revenueamount is recognized ratably over the term or bundled software license periodand the related hardware costs are deferred and recorded in cost of salesratably over the same period.

*Valuationof Accounts Receivable*...Due to the nature and credit quality of our customer base(principally major pharmaceutical companies, universities and largerbiotechnology companies), provision for bad debts is typically calculated on acase-by-case basis and takes into consideration the age of the outstandingreceivable amount by customer, the customer's cash position, and the geographiclocation of the customer.  Historically, we have a very low experience rate ofuncollectible amounts.  Management believes that alternative methods for calculatingallowances for bad debts such as percentage of net sales or percentage ofpast-due receivables do not reflect our lower experience rates and thus thatthe specific identification method is more appropriate. If the financial condition of our customers were todeteriorate, resulting in an impairment of their ability to make payments,additional allowances may be required. We continually evaluate the adequacy ofour allowance for doubtful accounts and make adjustments in the periods any excess or shortfall isidentified.

**Item 7.   Management'sDiscussion and Analysis of Financial Condition and Results of Operations(continued)**

**CriticalAccounting Policies (continued)**

** **

*SoftwareDevelopment Costs...C*ostsrelated to new products are capitalized after the establishment oftechnological feasibility (working model) in accordance with Statement ofFinancial Accounting Standards ("SFAS") No. 86.  Amortization ofcapitalized 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 theproduct.  Currently, we use an estimated economic life of three to five yearsfor all capitalized software development costs.  We assess the recoverabilityof capitalized software development costs by comparing the remainingunamortized balance to the net realizable value of the related product.  Anyexcess is written off. These write-offs could be significant if we are unableto penetrate a market with a new product or experience a decline in revenuesfrom older capitalized products.

*Capitalizationand Valuation of Chemical Compound Costs*...Initial**costs to develop our LeadQuestcompounds (chemical compounds for sale for use in drug discovery) arecategorized as research and development expense until such time it becomesprobable that a saleable library can be successfully produced.  Therefore,costs for design, research, and analytical procedures for every library ofcompounds are expensed as incurred.  Our research chemists review the resultsof analytical procedures to determine if the chemical reactions completed asexpected and the product purity and product yields are within acceptabletolerances.  This "validation" process determines whether thechemistry is successful and if a saleable product will result.  We capitalizecosts to inventory once the validation process is completed and successful productionis reasonably assured.  If the core reaction is unsuccessful, the librarytemplate is abandoned and no further development takes place.  

Similarly, we capitalizethe costs of LeadDiscovery packages once we are reasonably assured of thesuccess of the underlying chemistry.  After this point we capture the costs oflabor, chemicals and screening activity into work in process inventory.  Shoulda LeadDiscovery library not reach its full potential as a standalone offering,we can utilize the products within discovery research contracts for customersor in our LeadQuest compound library.

Inventory amounts shownin the Consolidated Balance Sheet are net of an obsolescence reserve.  Incalculating the reserve for inventory held for sale, the age and sales trends ofeach category in the inventory are taken into account to determine the netrealizable value.  Any shortfall between the carrying cost of the inventory andthe net realizable value is provided for in the reserve.  A portion of theLeadQuest inventory is used in discovery research projects.  This portion ofthe inventory asset is depreciated over its 10-year expected useful life. 

*Property, plant and equipment*...All assets reflected under this category on ourBalance Sheet are held for use in the operations of Tripos.  Due to thefast-paced development of new technologies in computer hardware and laboratoryequipment, we closely monitor the original life expectancies of new purchasesand set our depreciation or amortization rates accordingly to best match theeconomic useful life of the asset.  Assets or equipment that are no longer ofuse to the organization are written down to their realizable value and thendisposed. 

*Incometaxes*...Tripos computes income taxes using the asset and liability methodprescribe by Statement of Financial Accounting Standards No. 109 "Accounting forIncome Taxes".  The primary difference between financial statement incomeand taxable income results from the use of different methods of computingdepreciation, capitalized development costs, and other timing differences. The effective tax rate differs from the statutory tax rate primarily due to theimpact of research and development credits, which are subject to interpretationof US federal tax regulations, and the change in valuation allowance related tonet operating loss carry-forwards.  Our methodology for recording incometaxes requires a significant amount of judgment in the use of assumptions andestimates.  Additionally, we use forecasts of certain tax elements such astaxable income and foreign tax credit utilization, as well as evaluate thefeasibility of implementing tax planning strategies.  Given the inherentuncertainty involved with the use of such variables, there can be significantvariation between anticipated and actual results.  Unforeseen events maysignificantly impact these variables, and changes to these variables could have a materialimpact on our income tax accounts*.*

**Item 7.    Management's Discussion and Analysisof Financial Condition and Results of Operations (continued)**

** CriticalAccounting Policies (continued)**

* Goodwilland other intangible assets.*The costs of acquired companies are allocatedfirst to their identifiable tangible and intangible assets based on estimatedfair values.  Costs allocated to identifiable intangible assets are generallyamortized on a straight-line basis over the remaining estimated useful lives ofthe assets.  The excess of the purchase price over the fair value ofidentifiable assets acquired, net of liabilities assumed, is recorded asgoodwill and is subject to impairment tests at least annually as required byStatement of Financial Accounting Standards No. 142, "Goodwill and OtherIntangible Assets."  If the impairment tests indicate that the carrying valueof goodwill exceeds its fair value, an impairment loss would be required to berecognized in the consolidated statements of operations in an amount equal tothe excess carrying value. In performingour impairment tests, the estimated fair value was based on a discounted cashflow analysis. Assumptions and estimates about future cash flows and discountrates are often subjective and can be affected by a variety of factors,including external factors such as economic trends and government regulations,and internal factors such as changes in our forecasts or in our businessstrategies. We believe the assumptions used in our impairment analysis arereasonable and appropriate; however, different assumptions and estimates couldaffect 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.

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):

|  |                                        |                                               | **2005**            |          | 2004      |          | 2003      |
|--|----------------------------------------|-----------------------------------------------|---------------------|----------|-----------|----------|-----------|
|  | Net  sales:                            |                                               |                     |          |           |          |
|  |                                        | Discovery  informatics products & support | **45 %**       |          | 38%       |          | 44%       |
|  |                                        | Discovery  informatics services               | **6  **   |          | 6    |          | 6    |
|  |                                        | Discovery  research products & services   | **49  **  |          | 56   |          | 48   |
|  |                                        | Hardware                                      | **--  **  |          | --   |          | 2    |
|  |                                        |    Total net sales                       | **100  ** |          | 100  |          | 100  |
|  | Cost  of sales: *                      | ** **                                    |                     |          |           |          |
|  |                                        | Discovery  informatics products & support | **25  **  |          | 21   |          | 17   |
|  |                                        | Discovery  informatics services               | **75  **  |          | 73   |          | 111  |
|  |                                        | Discovery  research products & services   | **76  **  |          | 68   |          | 68   |
|  |                                        | Hardware                                      | **85  **  |          | 81   |          | 86   |
|  |                                        |    Total cost of sales                   | **53  **  |          | 51   |          | 48   |
|  | Gross  profit                          | **47  **                            |                     | 49  |           | 52  |
|  | Operating  expenses:                   | ** **                                    |                     |          |           |          |
|  |                                        | Sales  and marketing                          | **19  **  |          | 19   |          | 25   |
|  |                                        | Research  and development                     | **20  **  |          | 14   |          | 24   |
|  |                                        | General  and administrative                   | **14  **  |          | 12   |          | 13   |
|  |                                        | Restructuring  charge                         | **1  **   |          | --   |          | --   |
|  |                                        |    Total operating expenses              | **54  **  |          | 45   |          | 62   |
|  | Income  (loss) from operations         | **(7) **                                 |                     | 4   |           | (10)     |
|  | Interest  income                       | **--  **                            |                     | --  |           | --  |
|  | Interest  expense                      | **(3) **                                 |                     | (2)      |           | (1)      |
|  | Other  income (expense), net           | **(2) **                                 |                     | 1   |           | 18  |
|  | Net  income (loss) before income taxes | **(12) **                                |                     | 3   |           | 7   |
|  | Income  tax expense (benefit)          | ** (4) **                           |                     | 3   |           | 3   |
|  | Net  income (loss)                     | **(8) **                                 |                     | 0   |           | 4   |
|  | Preferred  dividends                   | **- **                                   |                     | -   |           | --  |
|  | Net  income (loss)                     | **(8)%**                                      |                     | 0%       |           | 4%       |

* As a percentage of thecorresponding sales

** **

**Item 7.    Management's Discussion and Analysisof Financial Condition and Results of Operations (continued)**

** **

**Net Sales.**  Total net sales decreased 14% to $55.4million in 2005 from $64.8 million in 2004, which was up 20% over the $54.1million recorded in 2003.  The decrease in 2005 was primarily attributable tolower levels of production on the four-year $90 million strategic compound fileenrichment and hit follow-up contract with Pfizer which was successfullycompleted during the fourth quarter of 2005 and lower compound sales, allrelated to our discovery research business.  In addition our informaticsservices business experienced a decrease in revenues of $0.9 million in 2005compared to 2004, primarily due to the completion of a multi-year project withSchering AG along with smaller active projects in 2005.  Discovery informaticsproducts and support increased 1% or $218,000 in 2005.  The overall increasesin 2004 compared to 2003 were the result of higher revenues in discoverysoftware products and support (4% in 2004) along with higher discovery researchactivity (up 37% in 2004) principally due to the Pfizer contract to design andsynthesize chemical compounds.  Our discovery informatics service revenues grewin 2004 by 24%.  The 2004 growth in discovery informatics service revenues wasprimarily due to the successful delivery of milestones on existing contracts,including our contract with Schering AG.  Discovery informatics service isdiscussed in more detail below.  We generate a substantial portion of ourrevenues from the pharmaceutical industry.  New sales to this industryaccounted for approximately 83%, 83% and 76%, of total new sales in 2005, 2004,and 2003, respectively.

Net sales from our activities outside of NorthAmerica represented approximately 75%, 80% and 74% of total net sales in 2005,2004 and 2003, respectively, with Europe accounting for 70%, 75% and 67%, andthe remainder coming from customers in the Pacific Rim.  We believe thatrevenues from foreign activities will continue to account for a significantpercentage of our total net sales; however, with the conclusion of the Pfizerproject, we expect European business to be closer to 50% of total revenues inthe near term.  Software license sales in Japan for 2004 and through the secondquarter 2005 were adversely impacted by an injunction issued by a Japanesecourt against Tripos' local distributor that prevented it from selling acertain third-party software product that is an optional module within theTripos offerings.  More recently, the adverse effect of this ruling has beenmitigated through the introduction of what we believe to be a non-infringingversion of this software.

List prices for our software products have hadonly modest price increases and have therefore remained relatively stable overthe last few years.  Due to the competitive nature of the software market inwhich we sell, we expect that price increases for our more established productswill remain moderate for the foreseeable future. 

Increasing net sales from period to period isdependent, in part, on our ability to introduce new products and services,which are accepted by the market, and on our ability to penetrate new andexisting markets.  Sales to existing customers have represented over 90% oftotal revenues during each of the last three years, with 2005 sales to existingcustomers being 98%.

Total Discovery Informatics product and supportsales increased 1% to $24.9 million from $24.6 million in 2004 which was up 4%from 2003's $23.7 million.  The majority of our software licenses aretime-based from which the corresponding revenue is recognized on a ratablebasis over the length of each license term (typically 1 to 3 years). Revenuerecognition from time-based software license arrangements will normally stretchinto subsequent periods depending on the length of individual contract terms. As an illustration, the software revenue deferred from non-cancelable contractsinitiated in recent fiscal years that will be recognized in 2006-2009 and thereafteris projected to be over $20 million.  The table presented in "Note 11.Time-based Software License Arrangements" presents the total amounts ofdeferred revenues from non-cancelable time-based software license arrangements.

Our Discovery Informatics service activitieshave been significantly impacted by the overall slow-down in spending forproducts and services offered by firms such as us by the pharmaceuticalindustry in recent years.  Of late, the industry started to show signs ofrecovery in its outsource spending activity in terms of new projects being putout for bid.  Discovery Informatics service revenues decreased in 2005 by 23%to $3.1 million after increasing by 24% in 2004 to $4.0 million from $3.2million in 2003.  The reduction in 2005 revenues is attributable to the timingand size of ongoing projects in the current year.  The timing of revenuerecognition from discovery informatics services is typically subject toachievement of contractual milestones and thus varies from period to period. The increase in 2004 was principally due to progress on our amended contractwith Schering AG.  At the end of 2003, Tripos and Schering were in talksregarding the specifications and financial arrangements necessary to completethe development and deployment of the production version of the agreedtechnology scheduled for mid-2004.  Changes in the scope and funding required achange to the then existing contract.  Because these discussions were notfinalized as of December 31, 2003, we made an adjustment of $802,000 to reducethe revenue recognized up to that point from our contract with Schering.  Incalculating the amount of the adjustment to be recorded in 2003, Tripos assumedthat the project would not continue past delivery and rollout of the productionsystem in mid-2004.  

**Item 7.    Management's Discussion and Analysisof Financial Condition and Results of Operations (continued)**

This assumption led to a corresponding reductionof approximately $802,000 in the total revenues available under the contractthrough that mid-2004 delivery date.  Tripos was required to make thisadjustment to revenues so that its 2003 financial statements fairly reflectedthe project status and contractual terms as of December 31, 2003.  In mid-2004,Tripos and Schering agreed on an amendment to the contract that would providefunding to cover functionality and time that were not anticipated in theoriginal contract for full implementation of this project.  During 2004 and2005, Tripos achieved the agreed milestones and realized the incrementalrevenues. 

We derive Discovery Research revenues from ourcompound library product, LeadQuest, and discovery research activities. Discovery Research revenues decreased 24% to $27.4 million in 2005 from $36.0million in 2004, which was 37% higher than the $26.2 million recognized in2003.  The decrease in 2005 revenues was primarily attributable to lower levelsof production as the four-year $90 million strategic compound file enrichmentand hit follow-up contract with Pfizer moved toward completion in late 2005.  Thisdecline was coupled with lower compound sales that were partially offset byincremental discovery research activities with new customers.  As previouslydisclosed, revenues from Pfizer were expected to be lower in 2005 than 2004 asthe project came to completion.  Discovery Research revenues from Pfizer were$23.2 million in 2005 compared to $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.  The primary reason for theincreased revenue in 2004 compared to 2003 was the growth in production levelson the Pfizer contract.  The Pfizer project plan called for a ramp-up in theproduction and delivery of the custom compounds to their peak in 2004.  Revenuerelated to discovery research activities is recognized in accordance with SOP81-1, under the percentage of completion method using an output measure forrevenue recognition (units of delivery method).  

Hardware revenues declined 63% in 2005 to$48,000 from $131,000 in 2004, which was down 86% compared to the $960,000 in2003.  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 salesdecreased to $29.3 million in 2005, down 10% from 2004's $32.8 million, whichin turn was up 25% from $26.2 million in 2003.  These costs represent 53%, 51%and 48% of total net sales, respectively. 

Costs****of discovery informatics productsand support represented 25%, 21% and 17% of software license and support salesin 2005, 2004 and 2003, respectively.  Costs of software products 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 and 2004 costof sales was a write-down in the carrying cost of our ChemCoreRIO softwareasset of $1.3 million and $890,000, respectively.  We analyzed the netrealizable value of the asset based on our assessment of the market for theproduct given our current investment in sales and marketing for it, anddetermined that a reduction in the amount capitalized was appropriate in spiteof our belief that it is a valuable asset for future development.  In addition,the 2005 costs of sales include $382,000 of amortization expense related tosoftware products acquired in the January 2005 acquisition of Optive Research. Cost of sales as a percent to software sales has increased over the past fewyears due to a change in the mix of internal versus third-party products sold,thus resulting in higher royalty payments.  The effective rate of royalties maycontinue to fluctuate in future periods.  

Costs of discovery informatics services (DIS)represented 75%, 73% and 111% of discovery informatics service revenues in2005, 2004 and 2003, respectively.  Costs of DIS are direct charges for staff,travel and overhead required to develop custom software solutions for clients. 2003 cost of DIS exceeded revenues because of a charge for anticipated lossesunder our contract with Schering AG.  As stated above in the discussion of DISrevenues, Tripos was involved in negotiations with Schering to amend thespecifications and financial arrangements necessary to complete the developmentand deployment of the production version of the previously agreed technology. Because these discussions were not finalized by the end of 2003, Triposrecorded a charge of approximately $813,000 for the estimated project costs inexcess of the total project revenues that remained under the original contractterms.  In calculating the amount of the charge to be recorded, Tripos wasrequired to utilize the then existing contract terms, and could not assume thatthe project would continue past delivery and rollout of the production systemin mid-2004.  Tripos was required to record the excess costs so that itsyear-end financial statements fairly reflected the project status as ofDecember 31, 2003.  During 2004, the parties agreed on a revision to the scopeof functionality and an incremental amount of funding to cover completion ofthe project.  Tripos successfully achieved the agreedmilestones for 2004 and 2005.

**Item 7.    Management's Discussion and Analysisof Financial Condition and Results of Operations (continued)**

Costs of discovery research products andservices represented 76%, 68% and 68% of discovery research sales in 2005, 2004and 2003, respectively.  The cost of the discovery research business isrepresented by the raw material, direct labor and overhead costs to producecompound libraries and to deliver on contracted research projects.  Discoveryresearch contracts may also include third-party costs for production of largerquantities of intermediate or scale-up materials.  As a result, variability incost of sales may be attributed to the mix of compound products and discoveryresearch revenues.  The increase in the 2005 cost of discovery researchproducts and services as a percentage of sales is due to production inefficienciesincurred in the winding down of the four-year strategic compound fileenrichment and hit follow-up contract with Pfizer as well as additionalprovisions of approximately $725,000 incurred on our LeadQuest libraries as weperformed a re-analysis of all compounds during 2005.  The levels of cost ofsales of discovery research activities in 2004 and 2003 are primarily attributableto production under the Pfizer compound design and synthesis contract.  Asignificant component of cost of sales from 2003 to early 2004 was outsourcingrequired to successfully deliver against the contract, combined with thefinancial impact of the decline of the US dollar against the Great BritainPound Sterling where our operation is based.  See the discussion of discoveryresearch revenues above for additional information on this contract.  Althoughour reliance on outsourcing was essentially eliminated by the end of 2004 thusallowing for better control over costs and efficiency, we continue toexperience the effects of the further decline in the value of the US dollarthat adversely impacted margins. 

Costs of hardware represented 85%, 81%, and 86%of hardware sales in 2005, 2004 and 2003, respectively.  Cost of sales for hardwareconsists of the direct costs to us of the equipment sold.

**Gross Profit**was $26.1 million in 2005, $32.0 millionin 2004 and $27.9 million in 2003, which represents gross margin of 47%, 49%and 52%, respectively.  The decrease in gross margin in 2005 is primarilyattributable to the increase in the effective rate of royalties on discoveryinformatics products, the write-down of $1.3 million taken on our ChemCore Riocapitalized software asset, increased costs of production as a percentage ofrevenues on our Pfizer contract in discovery research, and additionalprovisions in the current year as we performed the re-analysis of our LeadQuestLibraries.  The decrease in gross margin in 2004 compared to 2003 isattributable to the increase in the effective rate of royalties on discoveryinformatics products, the ramp-up on the Pfizer compound file enrichmentproject and the write-down of $890,000 for the ChemCoreRIO capitalized softwareasset.  Gross profit for the Company is dependent on the mix of discoveryresearch versus discovery informatics business, the costs of chemical materialsand overhead, the mix of internal versus third-party software product sales,foreign exchange rates and the company's ability to successfully deliver oninformatics contracts.

**Sales and Marketing Expenses**decreased 15% to $10.7million in 2005 from $12.6 million in 2004, which was a decrease of 5% from$13.2 million in 2003.  Sales and marketing expenses represented 19%, 19% and25% of 2005, 2004, and 2003 total net sales, respectively.  The decrease insales and marketing expenses of $1.9 million during 2005 is primarilyattributable to lower employee costs from open positions, lower commissions, andlower travel expense totaling $1.4 million. The expiration of certainconsulting relationships and lower marketing expenses totaled $500,000.    During2004, we realized expense savings in the Sales and Marketing organization dueto open or eliminated positions, estimated at $600,000.  

**Research and Development Expenses**increased 17% in 2005 to$10.9 million from the $9.3 million in 2004, which was down 28% from $12.9million in 2003.  R&D costs represented 20%, 14%, and 24% of net sales in2005, 2004 and 2003, respectively.  The increase in R&D expenses in thecurrent year is almost entirely attributable to 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.  As previouslydisclosed, in December we announced that we had initiated a 30 day consultationperiod as mandated by UK law to complete a reduction in force for our DiscoveryResearch business based in Bude, England.  We initiated this action tostreamline our Discovery Research business and associated cost structure as aresult of our successful completion of the four-year $90 million file enrichmentproject with Pfizer in the fourth quarter of 2005.  We subsequently completedthis process in January 2006, reducing our workforce by 76 positions with anestimated cost of $0.9 million to be taken as a restructuring charge in thefirst quarter of 2006.  Research and development costs in our discovery

**Item 7.    Management's Discussion and Analysisof Financial Condition and Results of Operations (continued)**

informaticssegment included $1.7 million of software development that was capitalized.  Thereduced level of R&D expense in 2004 compared to 2003 reflects: 1) morescientific costs charged to cost of sales for the Pfizer and other discoveryresearch contracts; 2) redeployment of our discovery informatics personnel towork on software product development resulting in the capitalization ofsoftware development costs ($630,000) for our new Benchware discoveryinformatics products; 3) inventoried costs of our new LeadDiscovery chemistrypackages ($1.2 million); and 4) reduced headcount in our discovery informaticsgroup.  The Benchware and LeadDiscovery products were released to the market inthe latter part of 2005. 

Research and development expenses, including theamount of capitalized costs were $12.6 million in 2005, $11.2 million in 2004,and $14.2 million in 2003.  In accordance with Statement of FinancialAccounting Standards No. 86, the Company capitalizes software development costsfor external use.  Tripos anticipates that its investment in new productresearch will continue to be significant as we develop new software moduleseach year, work on funded software research contracts with customers, developnew technologies for use in our informatics consulting work, and pursue novelcompound templates for inclusion in our LeadQuest and LeadDiscovery libraries. Costs associated with investigating novel compound templates are classified asR&D up until such time as the base reaction is validated, after which costsare captured in inventory.

**General and Administrative Expenses**decreased 1% to $7.7million in 2005 from the $7.8 million in 2004 which was up 7% from the $7.2million in 2003.  G&A expenses represented 14%, 12% and 13% of net salesfor 2005, 2004 and 2003, respectively.  The increase in general andadministrative expenses as a percentage of revenues in 2005 was attributable tolower sales volumes in 2005 while costs decreased slightly by $75,000. Increased G&A expenses for 2004 are primarily the result of legal fees thatwere subject to the deductible under our insurance policy to defend against theclass action lawsuit ($300,000) and costs to document and test internalcontrols for compliance with the Sarbanes-Oxley Act of 2002 ($237,000).  Weexpect general and administrative spending to remain relatively stable, butwill fluctuate as a percentage of sales.

**Restructuring Expenses**in 2005 represents animpairment charge related to a temporary laboratory building at our discoveryresearch center.  During December 2005, we completed our four-year $90 millionfile enrichment contract with Pfizer.  With the completion of the Pfizercontract, this temporary building was no longer needed for productionactivity.    We do not expect that the building would be saleable in itspresent condition and alterations to qualify for permanent treatment with thelocal authorities would not have increased the market value.  As such, werecorded an impairment loss related to this building in the amount of $861K,reducing the net carrying value to zero.  In addition, as discussed above inresearch and development expenses, we expect to take a $0.9 million charge inthe first quarter of 2006 as a result of a reduction in force at our discoveryresearch business that was initiated in December of 2005 and subsequentlycompleted in January 2006.  See additional discussion in Note 26 to theConsolidated Financial Statements.

**Interest Income**was $130,000 in 2005,$127,000 in 2004 and $208,000 in 2003.  The reduction from the 2003 levelreflects a decreasing average amount of cash on hand due to lower levels of cashgenerated from operations in 2005 and the reduction of outstanding debt in2004.** **

**Interest Expense**of $1.7 million in 2005,$1.1 million in 2004 and $516,000 in 2003 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 2005 related to the subordinated note issued in the acquisition of OptiveResearch.  In January 2005, we issued a $3.5 million subordinated promissorynote with a stated interest rate of 11.4 % as part of consideration in theOptive acquisition.  Interest expense associated with the subordinated debttotaled $453,000 in 2005.  Interest expense has varied commensurate with thechange in average outstanding debt balances to finance the expansion of the UK chemistry lab in 2004 and to acquire Optive Research in 2005.  The floating rateincurred by the Company on the mortgage note averaged 3.8% in 2004 and 5.5% in2005.  The interest rate incurred on our line of credit was 6.5% in 2005 and4.3% in 2004.  Interest rates on our capital leases range from 3% to 8%.

**Other Income (expense)**was $(810,000) in 2005,$829,000 in 2004 and $9.4 million in 2003.  In 2005 we sold our 33,000 sharesof NuVasive, Inc. realizing a gain of $240,000 along with net gains of $101,000on our investment in the AM Pappas Life Science II Fund.  These gains in 2005 areoffset by $1.1 million of currency losses due to the strength of the U.S.dollar against European currencies, offsetting gains realized in recent years. Early in 2004 we sold the last of our holdings of Arena Pharmaceuticals, Inc.("Arena") common stock and realized a gain of $144,000.  The remainder of the2004 other income was from foreign currency gains realized by our European subsidiaries. 2003 other income included a $6.7 million pre-tax gain on the sale of just under1.3 million shares of Arena. 

**Item 7.    Management's Discussion and Analysisof Financial Condition and Results of Operations (continued)**

 In addition, the Company benefited from a $900,000gain on the mark-to-market of a series of foreign exchange hedges that fixedthe rate of U.S. dollars to British pounds.  Also, due to the weakness of theU.S. dollar, our European subsidiaries recorded currency exchange gains ofapproximately $2.0 million. 

** Income Tax Expense (Benefit). **Our tax expense(benefit) was $(2.1) million in 2005, $2.0 million in 2004 and $1.6 million in2003.  The effective tax rates were (32.6)%, 89.6% and 42.8% for 2005, 2004 and2003, respectively.  The effective tax rates for 2005, 2004 and 2003 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 high tax rate in 2004 results from taxes accrued incertain jurisdictions that were not mitigated by the benefit of losses in otherjurisdictions at that time.  The tax benefit recorded in 2005 reflects thevalue of R&D tax credits claimed in the U.K. for 2002 through 2005 that wewere not able to record until it became "more likely than not" that the creditswould be allowed.  These credits effectively offset the prior years' taxes duein the U.K. resulting in net deferred tax assets.  These excess deferred taxassets are offset by a valuation allowance.    The establishment of thevaluation allowance for the deferred tax assets does not impair our ability touse the deferred tax assets upon achieving profitability in the relatedjurisdictions.  Upon the recognition of income in future periods in thejurisdictions where the deferred tax assets were created, release of thecorresponding valuation allowances may result in a lower effective tax rate.

** Liquidity and Capital Resources**

Operating Activities.  Net cash provided from2005 operating activities was $4.6 million.  Cash was generated by reconcilednet income of $2.0 million consisting of a net loss of $4.3 million plus theadd-back of non-cash depreciation and amortization including the amortizationof debt discount totaling $7.3 million, the add-back of write-down of impairedinvestment and impairment charge on building of $0.2 million and $0.9 million,respectively, the deduction of gains from the sale of marketable securities of$0.5 million, and a change in the deferred tax benefit of $1.5 million.  Inaddition cash was generated by a reduction in inventory of $5.7 million and in accountsreceivable totaling $3.5 million.  These increases in cash were partiallyoffset by a decrease in deferred revenues of $4.0 million and decreases inaccounts payable and accrued expenses of $2.6 million.  Inventory, accountsreceivable and deferred revenues were all reduced in 2005 due to the completionof Pfizer contract in December 2005.  Amortization for 2005 included a $1.3million charge for the write-down of the carrying value of our ChemCoreRIOsoftware asset to its expected net realizable value.  This software productremains valuable to the company for future projects, but is not currentlyprojected to generate revenue in the near term. 

Net cash provided from 2004 operating activitieswas $13.3 million.  Cash was generated by net income of $0.2 million, netcollections of accounts receivable of $2.1 million, reductions of inventory of$1.8 million, reductions of prepaid expenses and changes in deferred taxes of$0.5 million each, increases in deferred revenues of $3.1 million, delivery oncurrency hedges outstanding at the end of the prior year in the amount of $0.9million plus the add-back of non-cash depreciation and amortization expenses ofa combined $4.6 million and the add back of the write-down of impairedinvestment of $0.1 million.  Inventory was reduced in 2004 due to sale of morequantities of chemical products and reduced production time on the Pfizercontract.  2004's lower level of accounts receivable reflects a change in theinvoice timing of a significant informatics contract compared to 2003. Depreciation commenced early in 2004 upon the completion and fit-out of our U.K. laboratory leading to the higher levels compared to prior years.  Amortization for2004 included $0.9 million for the write-down of the carrying value of ourChemCoreRIO software asset to its expected net realizable value.  Operatingfunds in 2004 were used to reduce accounts payable and accrued expenses by $0.5million.

Net cash used by operating activities in 2003was $1.2 million.  Sources of operating funds for 2003 were net income of $2.1million, net collections of accounts receivable of $0.2 million, changes in netdeferred tax position of $2.7 million, additions to accounts payable &accrued expenses of $1.7 million, increased deferred revenue of $1.8 millionplus the add-back of non-cash depreciation and amortization expenses of acombined $3.7 million and the add-back of write-down of impaired investment of$0.3 million.  Uses of operating funds in 2003 were increases to inventory of$5.4 million (includes approximately $3.0 million of product awaiting shipment toPfizer) and an increase in prepaid expenses of $0.5 million.  In addition, weexcluded the effect of gains on sales of shares of Arena Pharmaceuticals of$6.7 million and the appreciation in our foreign currency forward contracts of$0.9 million.  Depreciation expense has grown over the past two years as aresult of our capital investments in the Tripos Discovery Researchlaboratories.   Inventory levels peaked in 2003 related to our deliverycommitments to Pfizer.

**Item 7.    Management's Discussion and Analysisof Financial Condition and Results of Operations (continued)**

Investing Activities.  Net cash utilized ininvesting activities during 2005 was $7.3 million.  During 2005 we acquiredOptive Research, consuming cash of $4.8 million, made new investments inequipment of $1.3 million, and invested in new informatics product development totaling$1.7 million.  We also made additional investments in the A.M. Pappas LifeScience II fund of $0.3 million.  We received $0.7 million from the sale of marketablesecurities.

Net cash utilized in investing activities in2004 was $1.0 million.  During 2004 we invested $0.5 million in the completionof our U.K. chemistry facility along with computer equipment for our discoveryinformatics area.  Also in 2004 we invested an additional $0.3 million in theA.M. Pappas Life Science II fund plus $0.6 million in new informatics productdevelopment.  We realized proceeds of $0.4 million from the sales of marketablesecurities and equipment.  

Investing activities in 2003 utilized a net of $1.7million.  We spent $5.3 million on our U.K. laboratory facility building andequipment along with $1.3 million for the development of our ChemCoreRIOsoftware technology.  These expenditures were substantially funded by the $8.8million of proceeds from the sale of shares in Arena Pharmaceuticals.  As ofDecember 31, 2003, we had 31,000 shares (market value of $192,000) of Arenaremaining.  Additionally, we made investments in A.M. Pappas Life Science IIfund of $0.4 million in 2003, however, we took a combined write-down of ourinvestment in the Life Science II fund and Signase, Inc. of $0.2 million asdiscussed in Notes 18 and 21 below. 

Financing Activities.  Net cash provided byfinancing activities in 2005 was $5.1 million, consisting of proceeds from theissuance of long-term debt and capital leases of $5.7 million, borrowings onthe revolving line of credit of $18.1 million and proceeds from stock optionsand stock purchase plans of $0.3 million.  During 2005 we made payments on long-termdebt and capital leases of $19.1 million.  Included in the proceeds fromissuance of long-term debt is $3.5 million related to a promissory note we issuedto fund the acquisition of Optive Research.  The remaining proceeds wereobtained from new financing.  

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 $0.9 million.  We made payments totaling $18.9 million on debtand capital leases resulting in net cash used from financing activities of $9.6million for 2004.  

Financing activities yielded a net $4.2 millionof cash in 2003.  Our outstanding borrowings on bank lines of credit increasedby a net $5.3 million.  Payments on capital leases were $1.5 million.  We alsoreceived $0.4 million from shares issued under employee stock plans.  

We financed equipment and fixtures acquisitionsat our chemistry laboratory through capital leases of $2.0 million, $3.7million and $5.4 million in 2005, 2004 and 2003, respectively.  In 2005, newequipment of $59,000 was acquired through capital lease financing.  The balanceof 2005 represented sale-leaseback transactions involving previously acquiredequipment.

Over the next 12 to 18 months, we may be askedto fund the remainder of our investment commitment ($0.4 million) to the A.M.Pappas Life Science II Fund.

In April 2005, the company and LaSalle Bankexecuted an amendment to the existing credit facility that increased therevolving credit portion of the facility by $0.5 million to $6.5 million andprovided for a maturity date of April 18, 2006 of the credit facility portion. Also, the maturity date on the mortgage portion of the facility was extendedfrom December 2005 to April 2008.  Thecredit facility required us to meet certain financial covenants, includingminimum debt service coverage, minimum shareholders' equity, maximum capitalexpenditure (excluding the chemistry laboratory expansion) and an annualclean-down period of 30 consecutive days in which no borrowings are outstandingon the revolving credit facility.  At December 31, 2005, we had borrowingsoutstanding of $4.4 million on the line of credit that were included inshort-term debt. 

```
At December 31, 2005 we were not in compliance with certain covenants of our revolving credit facility, including the minimum debt service coverage and minimum
```

```
shareholders' equity. We obtained waivers from LaSalle Bank for the period ending December 31, 2005.  LaSalle Bank has provided the Company with a
```

```
commitment to extend this facility to January 01, 2007, decrease its commitment to $6 million, eliminate the annual clean-down requirement, implement a borrowing
```

```
base on 85% domestic and insured foreign accounts receivable plus $1.8 million of excess equity in U.S. real estate, a revised minimum shareholders' equity covenant
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 tested quarterly and a minimum consolidated cash balance covenant tested monthly.
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**Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)**
```

 We are currently in the process ofdocumenting this amendment and extension, which we expect will be concludedpromptly.We expect to fund prospective operating needs and capital expenditures through cash from operations and other resources that become available to us.  We believe that with our cash, accounts receivable balances, projected cash flows from operations, access to available borrowings from LaSalle Bank under the amendment described above and future extensions which we intend to pursue prior to the January 1, 2007 maturity, incremental capital leases, and potential other capital sources, if any, we will be able to meet our liquidity and capital expenditure requirements for at least the next twelve months.  Although we have taken steps intended to better align our operating costs to our expected revenues as a result of the completion of our four year Pfizer contract, our working capital could be adversely affected if we are not entirely successful in these efforts.  However, we expect that our capital expenditure requirements will be substantially lower than in recent years due to the completion of our chemistry laboratory expansion.  See Note 22 of the Notes to Consolidated Financial Statements for a discussion of our credit facilities.

** **Despite current capital markets uncertainties,we believe that it may be prudent for us to seek additional financing tosupport our objectives to enhance product development, expand existing marketsand enter new markets, enhance our capital base for other purposes, anddiversify our working capital resources beyond those provided by LaSalle Bank. In making decisions regarding access to additional capital, we would considerthe availability and terms of financing alternatives, and the expectedfinancial impact of any financing, including any near-term dilutive impact,that we might incur in pursuit of our objective to maintain financialflexibility to support planned and opportunistic growth of our business and theongoing consideration of our strategic objectives.  Additional capital may bein the form of equity or debt securities, and may be raised in public offeringor private placement transactions.  

##### Recent AccountingPronouncements

InNovember 2004, the Financial Accounting Standards Board ("FASB")issued Statement of Financial Accounting Standards ("SFAS") No. 151"Inventory Costs-an amendment of ARB No. 43, Chapter 4" ("FAS151").  FAS 151 clarifies the accounting for abnormal amounts of idlefacility expense, freight, handling costs, and wasted material (spoilage) torequire that these items be included as current-period charges and not includedin overhead.  In addition, FAS 151 requires that allocation of fixed productionoverheads to the costs of conversion be based on the normal capacity of theproduction facilities.  The provisions in FAS 151 are effective for inventorycosts incurred during fiscal years beginning after June 15, 2005. We haveadopted FAS 151 for the fiscal year beginning January 1, 2006 and areestimating $900,000 to $1.0 million of idle facility costs in 2006 which willbe recorded as current period costs in general and administrative expenses.  Theupcoming adoption of FAS 151 coincides with the generation of excess plantcapacity resulting from the completion of the Pfizer contract in December 2005

InDecember 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-BasedPayment" ("FAS 123R"), which revises and replaces SFAS No. 123,"Accounting for Stock-Based Payment" and supersedes APB Opinion No.25, "Accounting for Stock Issued to Employees".  FAS 123R requiresthe measurement of all share-based payments to employees, including grants ofemployee stock options, using a fair-value based method and the recording ofsuch expense in our consolidated statements of operations.  The pro-formadisclosures previously permitted under SFAS No. 123 will no longer be analternative to financial statement recognition.  The provisions of FAS 123Rwere to have been effective for reporting periods beginning after June 15,2005.  At the end of March, the SEC staff released Staff Accounting BulletinNo. 107 (SAB 107), providing guidance for implementing FASB Statement No. 123(revised 2004), *Share-Based Payment* (Statement 123R).  Subsequently, theCommission delayed the implementation dates for Statement 123R to the start ofa Company's fiscal year.  As a result, we will be required to comply with theprovisions of FAS 123R beginning January 1, 2006. Based upon informationavailable we are expecting net income to be reduced by approximately $570,000 in2006 related to additional non-cash compensation expense for outstanding stockoptions and issuances under our Employee Stock Purchase Plan using the modifiedprospective application. 

InMay 2005, the FASB issued SFAS No. 154 "Accounting Changes and ErrorCorrections-a replacement of APB Opinion No. 20 and FASB Statement No. 3" ("FAS 154").  FAS 154 requiresretrospective application to prior periods' financial statements of changes inaccounting principle, unless it is impracticable to determine either theperiod-specific effects or the cumulative effect of the change.  When it isimpracticable to determine the period-specific effects of an accounting changeon one or more individual prior periods presented, FAS 154 requires that thenew accounting principle be applied to the balances of assets and liabilitiesas of the beginning of the earliest period for which 

**Item 7.    Management's Discussion and Analysisof Financial Condition and Results of Operations (continued)**

retrospectiveapplication is practicable and that a corresponding adjustment be made to theopening balance of retained earnings for that period rather than being reportedin an income statement.  When it is impracticable to determine the cumulativeeffect of applying a change in accounting principle to all prior periods, thenFAS 154 requires that the new accounting principle be applied as if it wereadopted prospectively from the earliest date practicable.  The provisions ofFAS 154 are effective for accounting changes and corrections of errors made infiscal years beginning after December 15, 2005.

InMay 2005, the FASB issued FASB Staff Position No. EITF 00-19-1"Application of EITF Issue No. 00-19 to Freestanding Financial InstrumentsOriginally Issued as Employee Compensation" ("FSP EITF00-19-1").  FSP EITF 00-19-1 provides guidance on how to assess whether anissuer has the ability to control the form of settlement for options and sharerights originally issued as employee compensation.  When these options andshares originally issued as employee compensation can only be settled bydelivering registered shares, then FSP EITF 00-19-1 nullifies the provisions ofEITF 00-19 that require the assumption of cash settlement and thus classifiedas an asset or liability.  The terms of such instruments are to be evaluatedusing paragraph 34 of FAS 123R to determine whether they should be recorded asequity or liabilities.  The guidance in FPS EITF 00-19-1 is applied in accordancewith the effective date and transition provisions of FAS 123R. 

## In February 2006, the FASB issued SFAS No. 155 "Accountingfor Certain Hybrid Financial Instruments-an amendment of FASB Statements No.133 and 140" ("FAS 155").  FAS 155 addresses the following: a) permits fair value remeasurement for any hybrid financialinstrument that contains an embedded derivative that otherwise would requirebifurcation; b) clarifies which interest-only strips and principal-only stripsare not subject to the requirements of Statement 133; c) establishes arequirement to evaluate interests in securitized financial assets to identifyinterests that are freestanding derivatives or that are hybrid financialinstruments that contain an embedded derivative requiring bifurcation; d) clarifiesthat concentrations of credit risk in the form of subordination are notembedded derivatives; and e) amends Statement 140 to eliminate the prohibitionon a qualifying special-purpose entity from holding a derivative financialinstrument that pertains to a beneficial interest other than another derivativefinancial instrument. FAS 155 is effective for all financial instruments acquiredor issued after the beginning of an entity's first fiscal year that beginsafter September 15, 2006.  We are currently evaluating the requirements of FAS155, but do not expect that the adoption will have a material effect on ourfinancial statements. 

#####  

##### 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 foreignexchange risk, positive or negative.  Overall, however, due to the relativestability of the currency of the countries in which we operate and the level ofinvestment in each country, our current intent is to retain assets within ourforeign operations to fund those operations**.**

** **

##### Disclosures required 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 requires companies todisclose all material off-balance sheet transactions, arrangements, obligationsand other relationships.  For the periods ending December 31, 2005 and 2004,Tripos had no off-balance sheet transactions or arrangements other thanordinary operating leases that are further discussed in Note 8 of Tripos'consolidated financial statements contained in this Form 10-K

** **

**Item 7.    Management's Discussion and Analysisof Financial Condition and Results of Operations (continued)**

The table that follows summarizes existing contractualobligations by type:

| (000's omitted)                              | **Payments due by period  *** |
|----------------------------------------------|-------------------------------|
| Contractual obligations                      | Total                         | Less than 

1 year | 1-3 years | 3-5 years | More than

5 years |
| Bank debt:                                   |                               |  |  |  |  |
|      Line of credit | $4,734                        | $4,734 | $ -- | $ -- | $ -- |
|      Mortgage loan  | 4,197                         | 444 | 3,753 | -- | -- |
| Subordinated debt                            | 4,273                         | 906 | 3,232 | 135 | -- |
| Capital lease obligations                    | 4,480                         | 2,956 | 1,524 | -- | -- |
| Operating leases                             | 2,482                         | 748 | 868 | 557 | 309 |
| Purchase obligations  +                 | 143                           | 143 | -- | -- | -- |
| Total                                        | $20,309                       | $9,931 | $9,377 | $692 | $309 |

* Interest rates on the floating rate long-termdebt (line of credit) are assumed to be constant for the purposes of thistable.  For this table, we have assumed that $4,400,000 of the revolving creditfacility is outstanding throughout 2006 and that would generate an interestpayable of $334,000 at a constant rate of 7.5%.  For the mortgage loan we haveassumed an interest rate of 6.3% until maturity in April 2008.  Thesubordinated debt represents scheduled payments through completion on January1, 2009 at a fixed rate of 11.4%. 

+ Purchase Obligations represent commitments formaterial capital expenditures (building and equipment) related to our chemistrylaboratory at Tripos Receptor Research.

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.  To date, interest rate exposure has not resulted in a materialimpact.   During 2003, 2004 and 2005, the Company did experience a significantimpact from foreign exchange.  The costs to perform the custom design andsynthesis contract with Pfizer are incurred in British pounds sterling while weare compensated in U.S. dollars for much of the work.  As a result, our grossprofit was adversely affected by the decline in the U.S. dollar against thepound.  Part of this effect was offset through foreign currency forwardcontracts whose gains were recorded in "Other Income".

Our foreign exchangerisk is presently limited to currencies that historically have exhibited onlyminor fluctuations although from 2003 through 2005, 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 2005 $13.0million, 2004 $12.2 million and US dollar/Euro balances 2005 $3.0 million, 2004$2.3 million, respectively.  The potential reduction in fair value resultingfrom a hypothetical 10% adverse change in US dollar/UK pound currency exchangerates would be approximately $1.3 million and $1.2 million at December 31, 2005and 2004, respectively, while the same 10% adverse movement in the USdollar/Euro rates would be approximately, $300,000 and $230,000 for 2005 and2004 year-ends, respectively.  Any loss in fair value of permanently investedfunds would be reflected in Other Comprehensive Income and would not impact ournet 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.

**Item8.    Financial Statements and Supplementary Data**

| **Consolidated Balance  Sheets**                                                                                    | ** **             | ** **     | ** **          |
|---------------------------------------------------------------------------------------------------------------------|------------------------|----------------|---------------------|
| *In thousands (except per  share amounts)*                                                                          | **December 31,**       |                | December 31,        |
|                                                                                                                     | ** **             | **2005 ** |                     | 2004  |
| **Assets:**                                                                                                         |                        |                |                     |  |  |
| Current assets:                                                                                                     |                        |                |                     |  |
|    Cash and  cash equivalents                                                                        | **$6,241 **       | ** **     | $ 4,171   |
|    Marketable  securities                                                                            | **--  **     | ** **     | 341            |
|    Accounts  receivable, less allowance for doubtful accounts                                        | ** **             |                |                     |
|         of  $**190** in 2005 and $246 in 2004                               | **11,219 **       | ** **     | 15,666         |
|    Inventory                                                                                         | **5,155 **        | ** **     | 12,007         |
|    Deferred  income taxes                                                                            | **--  **     | ** **     | 29             |
|    Prepaid  expenses                                                                                 | **4,386 **        | ** **     | 5,603          |
|         Total  current assets                                               | **27,001 **       | ** **     | 37,817         |
| Property and equipment,  less accumulated depreciation                                                              | **26,789 **       | ** **     | 30,672         |
| Capitalized development  costs, net of accumulated amortization                                                     | ** **             |                |                     |
|         of  **$2,515** in 2005 and $933 in 2004                             | **2,291 **        | ** **     | 2,159          |
| Goodwill                                                                                                            | **5,255 **        | ** **     | 965            |
| Intangible assets, less  accumulated amortization                                                                   | **3,554 **        | ** **     | 90             |
| Investments recorded at  cost                                                                                       | **1,695 **        | ** **     | 1,397          |
| Deferred income taxes                                                                                               | **231 **          | ** **     | --             |
| Other, net                                                                                                          | **--  **     | ** **     | 22             |
|         Total  assets                                                       | **$66,816 **      | ** **     | $ 73,122       |
| * *                                                                                                            |                        |                | ** **          |  |  |
| **Liabilities and  shareholders' equity:**                                                                          | ** **             |                |                     |
| Current liabilities:                                                                                                |                        | ** **     |                     |  |
|    Current  portion of long-term debt                                                                | **$ 5,241 ** |                | $ 4,514   |
|    Current  portion of capital leases                                                                | **2,741 **        |                | 3,689          |
|    Accounts  payable                                                                                 | **1,219 **        |                | 1,796          |
|    Accrued  expenses                                                                                 | **4,970 **        |                | 8,950          |
|    Deferred  revenue                                                                                 | **15,898 **       |                | 21,945         |
|         Total  current liabilities                                          | **30,069 **       |                | 40,894         |
|                                                                                                                     |                        |                | ** **          |  |  |
| Long-term portion of  capital leases                                                                                | **1,343 **        |                | 2,653          |
| Long-term debt                                                                                                      | **5,891 **        |                | --        |
| Deferred income taxes                                                                                               | **--  **     |                | 1,709          |
|                                                                                                                     |                        |                | ** **          |  |  |
| Shareholders' equity                                                                                                |                        | ** **     |                     |  |
|    Common  stock, $.01 par value; authorized 20,000 shares; issued                                   | ** **             |                |                     |
|         and  outstanding **10,190** shares in 2005 and 9,359 shares in 2004 | **102 **          |                | 94             |
|    Additional  paid-in capital                                                                       | **41,846 **       |                | 37,394         |
|    Retained  earnings (deficit)                                                                      | **(12,377)**           |                | (8,089)             |
|    Other  comprehensive income (deficit)                                                             | **(58)**               |                | (1,533)             |
|         Total  shareholders' equity                                         | **29,513 **       |                | 27,866         |
|         Total  liabilities and shareholders' equity                         | **$66,816 **      |                | $ 73,122  |
|                                                                                                                     |                        |                | ** **          |  |  |
| *See notes to consolidated  financial statements*                                                                   |                        |                |                     |

** **

** **

| **Consolidated Statements  of Operations**                                |
|---------------------------------------------------------------------------|
| *In thousands, except per  share amounts*                                 | ** ** |  | ** ** |
|                                                                           | **Year ended** | Year ended | Year ended |
|                                                                           | **December 31, 2005** | December 31, 2004 | December 31, 2003 |
| * *                                                                  | ** ** |  |  |
| **Net sales:**                                                            |  |  |  |
|     Discovery  informatics products & support     | **$ 24,857 ** | $ 24,639  | $ 23,702  |
|     Discovery  informatics services                   | **3,076 ** | 4,005  | 3,241  |
|     Discovery  research products & services       | **27,440 ** | 36,004  | 26,245  |
|     Hardware                                          | **48 ** | 131  | 960  |
|         Total  net sales          | **55,421 ** | 64,779  | 54,148  |
| **Cost of sales:**                                                        | ** ** |  | ** ** |
|     Discovery  informatics products & support     | **6,220 ** | 5,280  | 3,949  |
|     Discovery  informatics services                   | **2,320 ** | 2,911  | 3,588  |
|     Discovery  research products & services       | **20,761 ** | 24,455  | 17,879  |
|     Hardware                                          | **41 ** | 106  | 824  |
|         Total  cost of sales      | **29,342 ** | 32,752  | 26,240  |
| Gross profit                                                              | **26,079 ** | 32,027  | 27,908  |
| **Operating expenses:**                                                   | ** ** |  |  |
|     Sales  and marketing                              | **10,666 ** | 12,560  | 13,195  |
|     Research  and development                         | **10,866 ** | 9,294  | 12,917  |
|     General  and administrative                       | **7,696 ** | 7,771  | 7,241  |
|     Restructuring  charge                             | **861 ** | --   | --   |
|         Total  operating expenses | **30,089 ** | 29,625  | 33,353  |
| Income (loss) from  operations                                            | **(4,010)** | 2,402  | (5,445) |
| Interest income                                                           | **130 ** | 127  | 208  |
| Interest expense                                                          | **(1,668)** | (1,116) | (516) |
| Gain on sale of marketable  securities, net                               | **545 ** | 144  | 6,659  |
| Unrealized loss on unconsolidated  investments                            | **(204)** | (58) | (260) |
| Other income (expense), net                                               | **(1,151)** |  743  | 3,023  |
| Income (loss) before income  taxes                                        | **(6,358)** | 2,242  | 3,669  |
| Income tax expense  (benefit)                                             | **(2,070)** | 2,010  | 1,569  |
| Net income (loss)                                                         | ** **

**$ (4,288)** | $ 232  | $ 2,100  |
|                                                                           |  | ** ** |  |  |
| Basic earnings (loss)  per  share                                    | **$(0.42)** | $0.03  | $0.23  |
| Basic weighted average  number of shares                                  | **10,096 ** | 9,206  | 8,949  |
| Diluted earnings (loss) per  share                                        | **$(0.42)** | $0.02  | $0.23  |
| Diluted weighted average  number of shares                                | **10,096 ** | 9,357  | 9,333  |
|                                                                           |
|                                                                           |
| *See notes to consolidated  financial statements*                         |
|                                                                           |  |  |  |  |

** **

** **

| **Consolidated Statements  of Cash Flows**                                                                                  |                             |                   |
|-----------------------------------------------------------------------------------------------------------------------------|-----------------------------|-------------------|
| *In thousands*                                                                                                              | **Year ended**              | Year ended        | Year ended |
| * *                                                                                                                    | **December 31, 2005**       | December 31, 2004 | December 31, 2003 |
|                                                                                                                             | ** **                  |                   |  |
| **Operating activities:**                                                                                                   | * *                    | * *          |  |
| Net income (loss)                                                                                                           | **$ (4,288) **    | $ 232   | $ 2,100  |
| Adjustments to reconcile  net income                                                                                        | ** **                  |                   |  |
| to net cash provided by  (used in) operating activities:                                                                    | ** **                  |                   |  |
|     Depreciation  of property and equipment                                                             | **5,099 **             | 3,450        | 3,161  |
|     Amortization  of capitalized development      costs and other intangible assets | ** **

**2,140 ** | 1,137        | 493  |
|     Amortization  of debt discount                                                                      | **55 **                | --      |  --   |
|     Depreciation  (appreciation) in foreign currency      hedge instruments         | **--  **          | 925          | (941) |
|     Gain  from the sale of marketable securities                                                        | **(545)**                   | (144)             | (6,659) |
|     Write-down  of impaired investment                                                                  | **204 **               | 58           |   260   |
|      Impairment  charge on building                                                                | **861 **               | --      | --   |
|     Loss  (gain) on retirement of assets                                                                | **25 **                | (21)              | --  |
|     Deferred  income taxes                                                                              | **(1,911)**                 | 550          | 2,653  |
| Change in operating assets  and liabilities (excluding acquired business):                                                  | ** **                  |                   |  |
|     Accounts  receivable                                                                                | **3,547 **             | 2,134        | 192  |
|     Inventories                                                                                         | **5,691 **             | 1,780        | (5,426) |
|     Prepaid  expenses and other current assets                                                          | **(70)**                    | 537          | (494) |
|     Accounts  payable and accrued expenses                                                              | **(2,151)**                 | (505)             | 1,668  |
|     Deferred  revenue                                                                                   | **(4,050)**                 | 3,149        | 1,824  |
| Net cash provided by (used  in) operating activities                                                                        | **4,607 **             | 13,282       | (1,169) |
| **Investing activities:**                                                                                                   |                             | ** **        |  |  |
|     Purchases  of property and equipment                                                                | **(1,299)**                 | (475)             | (5,345) |
|     Proceeds  from the sale of equipment                                                                | **22  **          | 168          | --  |
|     Capitalized  development costs                                                                      | **(1,715)**                 | (639)             | (1,272) |
|     Proceeds  from the sale of marketable securities                                                    | **731 **               | 196          | 8,798  |
|     Acquisition  of business, net of cash received                                                      | **(4,753)**                 | --      | --   |
|     Other,  including investments in       unconsolidated affiliates                | **(311)**                   | (286)             | (414) |
| Net cash provided by (used  in) investing activities                                                                        | **(7,325)**                 | (1,036)           | 1,767  |
| **Financing activities:**                                                                                                   |                             | ** **        |  |  |
|     Proceeds  from stock issuance pursuant to      stock purchase and option plans  | ** **

**331 **   | 941          | 426  |
|     Borrowings  under revolving line of credit                                                          | **18,130 **            | 8,370        | 19,030  |
|     Proceeds  from issuance of long-term debt and      capital leases               | **5,684 **             | --           | --  |
|     Payments  on long-term debt and capital       lease obligations                 | **(19,079)**                | (18,947)          | (15,230) |
| Net cash provided by (used  in) financing activities                                                                        | **5,066 **             | (9,636)           | 4,226  |
| Effect of foreign exchange  rate changes on   cash and cash equivalents                                                     | **(278)**                   | (1,384)           | (3,740) |
| Net increase in cash and  cash equivalents                                                                                  | **2,070 **             | 1,226        | 1,084  |
| Cash and cash equivalents  at beginning of year                                                                             | **4,171 **             | 2,945        | 1,861  |
| Cash and cash equivalents  at end of year                                                                                   | **$ 6,241 **           | $ 4,171      | $ 2,945  |
|                                                                                                                             |                             |                   |  |  |  |  |
| Certain reclassifications  have been made to prior years' amounts to conform with current year  presentation                |
|                                                                                                                             |                             |                   | ** ** |
| *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** |
|----------------------------------------------------------------------------------------------|-------------------------|
| ** **                                                                                   | **12-31-2005**          | 12-31-2004 | 12-31-2003 |
| **Non-cash investing activities**                                                            | ** **              | ** ** |  |
|   Increase (decrease) in fair value  of marketable   securities, net of tax effect | **$ 53 **     | $ 97 | $ 335  |
|                                                                                              | ** **              |  |  |
| Purchase of new equipment through capital  lease financing                                   | **59  **      | 3,689 | 5,418 |

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  |

| ****
**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 December 31, 2002                                                                                                                                   | 8,889 | 89 | 36,032  | (10,421) | 4,624  | 30,324  |
| Stock  issued under stock purchase plan                                                                                                                    | 105 | 1 | 747  | --  | --  | 748  |
| Stock  issued under stock option plan                                                                                                                      | 46 | -- | 124  | --  | --  | 124  |
| Stock  issued under director

     compensation  plan                                                                                  | 6 | -- | 43  | --  | --  | 43  |
| Valuation  allowance on tax benefit from exercised stock options                                                                                           | -- | -- | (489) | --  | --  | (489) |
| Comprehensive  income, net of tax:                                                                                                                              |  |  |  |  | --  |  |
|      Translation  adjustment                                                                                                           | -- | -- | --  | --  | (2,067) | (2,067) |
|      Unrealized  gain on securities:                                                                                                   |  |  |  |  |  |  |
|         Unrealized  holding gains                                                                                       | -- | -- | --  | --  | 8  | 8  |
|         Less:  reclassification for          gains included in net income       | -- | -- | --  | --  | (3,797) | (3,797) |
|      Net  income                                                                                                                       | -- | -- | --  | 2,100  | --  | 2,100  |
| Total  comprehensive loss                                                                                                                                       |  |  |  |  |  | (3,756) |
| Balance  at December 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 (loss) 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 December 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:                                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|         Reclassification  for gains included in            net income | **--** | **--** | **-- ** | **-- ** | **(96)** | **(96)** |
|      Net  loss                                                                                                                         | **--** | **--** | **-- ** | **(4,288)** | **--** | **(4,288)** |
| Total  comprehensive loss                                                                                                                                       | ** ** | ** ** | ** ** | ** ** | ** ** | **(2,813)** |
|  

Balance  at December 31, 2005                                                                                                                           | ** **

**10,190** | ** **

**$ 102** | ** **

**$ 41,846** | ** **

**$ (12,377)** | ** **

**$ (58)** | ** **

**$ 29,513 ** |
|                                                                                                                                                                 |
|                                                                                                                                                                 |  |  |  |  |  |  |  |  |

*See notes to consolidatedfinancial statements*****

** **

**Notes to ConsolidatedFinancial Statements***December31, 2005*

#### 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 2005, 46% of our revenue came from our relationships with Pfizer, Inc.while in 2004, 54% and in 2003, 52%, of our global revenue was from Pfizer. Our four-year file enrichment project with Pfizer was completed during thefourth quarter of 2005.

*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.  Ourownership in un-consolidated affiliates is at or below 2% owned at December 31,2005.

*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 9 "Financial Instruments" for a further discussion offoreign currency exchange instruments.  During the first and second quarters of2005 we sold our remaining shares of NuVasive, Inc.  We had no marketable securitiesat December 31, 2005.  Marketable securities at December 31, 2004 consisted of33 shares of NuVasive, Inc. which had a market value of $341.  OtherComprehensive Income at December 31, 2005 and 2004 included an accumulatedunrealized after-tax gain of $0 and $96, respectively, as calculated on anaverage cost per share basis. 

*InvestmentsRecorded at Cost* consist ofinvestments in common stock and limited partnerships that are 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 Chemical CompoundCosts.*  Initial**costs to develop our LeadQuest compounds (chemical compounds for sale foruse in drug discovery) are categorized as research and development expenseuntil such time as it is probable that a salable 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 are as expected and the product purity and product yieldsare within acceptable tolerances.  This "validation" processdetermines whether the chemistry is successful and if a saleable product willresult.  We capitalize costs to inventory once the validation process is completedand successful production is reasonably assured.  If the core reaction isunsuccessful, the library template is abandoned and no further developmenttakes 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 

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

the net realizable value is provided for in thereserve.  A portion of the LeadQuest inventory is used in discovery researchprojects.  This portion of the inventory asset is depreciated over its 10-yearexpected useful life.

* *

*AccountingEstimates.  *The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the reported amounts of assets, liabilities and thedisclosure of contingent assets and liabilities at the date of the financialstatements as well as the reported amounts of revenue and expenses during thereporting period.  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 for2005, 2004 and 2003 was $0, $39 and $257, respectively.  

*Development Costs*primarily consist ofsoftware development costs related to new products that are capitalized afterthe establishment of technological feasibility (working model) in accordancewith Statement of Financial Accounting Standards ("SFAS") No. 86. During 2005, 2004 and 2003 capitalized costs were $1,715, $639 and $1,272,respectively related to development work on our Benchware Notebook, BenchwareDock and GALAHAD products in 2004 and 2005.  For 2003, capitalized costsrelated to a laboratory research and inventory support system, ChemCore RIO, tobe marketed to external customers.  Amortization of capitalized softwaredevelopment costs is provided on a product-by-product basis as the greater of(a) the ratio of current gross revenues for a product to the total current andanticipated future gross revenues or (b) the straight-line method over theremaining estimated economic life of the product.  Currently, we use anestimated economic life of three to five years for all capitalized softwaredevelopment costs.  We assess the recoverability of capitalized softwaredevelopment costs by comparing the remaining unamortized balance to the netrealizable value of the related product.  Any excess is written off.  Duringthe fourth quarter of 2005 and 2004 we wrote down one of our capitalizedproducts, ChemCore RIO, by $1,313 and $890, respectively, to properly reflectthe current net realizable value of the product based upon the change in targetmarket customer base.  This software product remains valuable to the companyfor future projects, but is not currently projected to generate revenue in thenear term.  For 2005, 2004 and 2003, amortization of software developed forsale was $270, $6 and $258, respectively.  At times, we capitalize developmentcosts attributable to internal use software in accordance with AICPA Statementof Position 98-1 "Accounting for the Costs of Computer Software Developedor Obtained for Internal Use".  Amortization of internal use software isover the estimated useful life or three years, which ever is less.  During 2004we wrote off the cost and accumulated amortization for fully amortizedcapitalized software assets for internal 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 12 "Goodwill and Other Intangible Assets" forfurther discussion.  

*Long-Lived Assets.*  In accordance withStatement of Financial Accounting Standards No. 144, "Accounting for theImpairment or Disposal of Long-Lived Assets", the Company reviewsidentified intangible and other long-lived assets for impairment wheneverevents or changes in circumstances indicate that the carrying value of theasset may not be recoverable.  If such events or changes in circumstances arepresent, an impairment loss would be recognized if the sum of the expectedfuture net cash flows is less than the carrying amount of the asset.  Duringthe fourth quarter of 2005, we completed our four-year $90 million fileenrichment contract with Pfizer.  At that time, we reviewed the carrying values

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

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 animpairment loss related to this building in the amount of $861K, equating toits net book value.  This charge is reflected in the Restructuring line on ourConsolidated Statements of Operations.

*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, 2004 and 2003due to fluctuations in the exchange rate between the U.S. dollar and the Euroand Great 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 enter into derivative contracts, principally currency hedges, tolimit the risk of fluctuations in foreign currency exchange rates on the valueof 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 were outstanding as of December 31, 2005.  We do notattempt to speculate on the direction of currency rates nor interest rates. See Note 9 for a further discussion of Financial 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 the use of the**assetand liability method whereby deferred tax assets or liabilities are calculatedat the balance sheet date using current tax laws and rates in effect. Valuation allowances are established when necessary to reduce deferred taxassets when it is more likely than not that a portion or all of the deferredtax assets will not be realized.  In accordance with FAS No. 109, income taxexpense includes 1) deferred tax expense, which generally represents the netchange in the deferred tax asset or liability balance during the year plus anychange in valuation allowances, and 2) current tax expense, which representsthe amount of tax currently payable to or receivable from a taxing authority. The primary difference between financial statement income and taxable incomeresults from the use of different methods of computing depreciation,capitalized development costs, certain revenue recognition activities, othertiming differences and the valuation of net operating loss carryforwards. Deferred taxes do not reflect temporary differences relating to our investmentin foreign subsidiaries as these amounts have been deemed to be permanentlyinvested.  Estimating the deferred tax position on these amounts is notpractical.

*RevenueRecognition*

**     DiscoveryInformatics Products 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 our multiple-

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

element arrangements and determined that we havesufficient VSOE to allocate revenues to maintenance and support services, andtraining.  We sell training separately and have established VSOE on thisbasis.  VSOE for maintenance and support is determined based upon the renewalrates in contracts themselves, which is based on a fixed percentage of thecurrent perpetual license list price.  Accordingly, assuming all other revenuerecognition criteria are met, revenues from perpetual licenses are recognizedupon delivery of the software using the residual method in accordance with SOP98-9, "Modification of SOP 97-2, Software Revenue Recognition, withRespect to Certain Transactions." 

Software maintenance agreements providetechnical support 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.

**     DiscoveryInformatics Services**

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 the contractto deliver software and installation requires significant production,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.  When current estimates of totalcontract revenue and contract cost indicate a loss, a provision for the entireloss on the contract is made in the period that the loss becomes evident.

DIS also includes software development("SD") projects that are contractual arrangements with customers foruse of our software developers in an effort to develop a scientific softwaretool for use 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 for undermilestone or completed contract basis depending on the negotiated terms.  Forthese arrangements, cost and revenues are deferred until achievement of themilestone or completion of the contract. 

**     Discovery ResearchProducts and Services**

Discovery research sales include:  (1) sales ofchemical compounds from inventory, (2) sales of compounds with associatedexclusive intellectual property, (3) long-term contracts to design and producechemical compounds to customer specifications, or (4) contracts to performdiscovery research 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,revenue is not recognized until the compounds have been shipped to thecustomer.  The selling price for compounds is fixed according to the terms ofthe contract or customer's purchase order.  Payment terms for chemical compoundtransactions are Net 30 days.  We have experienced very few bad debts arisingfrom these product transactions; as a result, collectibility is reasonablyassured.

In accordance with SOP 81-1, sales derived fromlong-term contracts to design and produce chemical compounds to customerspecifications are recorded using the percentage of completion method as thefinished goods are delivered (under the units of delivery method).  Thecontract costs related to delivered compounds are recorded to cost of sales asthe

** **

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

compounds are delivered and revenue isrecognized.

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. 

**     Hardware Sales**

Hardware sales are recorded upon delivery unlessdelivered in connection with a contractual arrangement involving term softwarelicenses.  When hardware is sold in conjunction with a term or bundled license,the entire contractual revenue amount is recognized ratably over the term orbundled software license period and the related hardware costs are deferred andrecorded in cost of sales ratably over the same period.

*Stock-BasedCompensation.* At December 31, 2005,Tripos had the stock-based employee compensation plans described in Note 24. We account for stock option plans under the intrinsic value method as permittedunder Accounting Principles Board Opinion No. 25 ("APB 25"),"Accounting for Stock Issued to Employees", and relatedInterpretations.  Under APB 25, generally no compensation expense is recognizedbecause the exercise price of the options equal the fair value of the stock atthe grant date.

Thefollowing table illustrates the effect on net income and earnings per share ifthe Company had applied the fair value recognition provisions of SFAS No. 123,"Accounting for Stock-Based Compensation", to stock-based employeecompensation.  Our stock option plans have fixed stock option 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             |  | 2003         |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------|--|------------------|--|--------------|
| Net income (loss) allocable  to common shareholders as reported                                                                                                                     | **$ (4,288)** |  | $ 232  |  | $ 2,100 |
| Deduct: Total stock-based  employee compensation expense determined under         fair value based method for all awards,  net of related tax effects | **833 **      |  | 1,346       |  | 1,823        |
| Pro forma net income (loss)  allocable to common shareholders                                                                                                                       | **$ (5,121)** |  | $ (1,114)   |  | $ 277   |
|                                                                                                                                                                                     |                    |  |                  |  |              |
| Pro forma earnings (loss)  per share:                                                                                                                                               |                    |  |                  |  |              |
|       Basic  - as reported                                                                                                                            | **$(0.42)**        |  | $0.03       |  | $0.23        |
|       Basic  - pro forma                                                                                                                              | **$(0.51)**        |  | $(0.12)          |  | $0.03        |
|       Diluted   - as reported                                                                                                                    | **$(0.42)**        |  | $0.02       |  | $0.23        |
|       Diluted   - pro forma                                                                                                                      | **$(0.51)**        |  | $(0.12)          |  | $0.03        |

*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 stock options andwarrants.  See Note 14 for additional information regarding earnings per share.

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

** **

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

* *

*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 financial statementthat is displayed with the same prominence as other financial statements. Comprehensive income is defined as the change in equity during a period fromtransactions and other events and circumstances from non-owner sources.  Netincome and other comprehensive income, including foreign currency translationadjustments, and unrealized gains and losses on investments, shall be reported,net of their related tax effect, to arrive at comprehensive income. 

The components ofaccumulated other comprehensive income, net of related tax, at December 31,2005 and December 31, 2004 are as follows:

|                                           | **2005**           | 2004           |
|-------------------------------------------|--------------------|----------------|
| Foreign currency translation adjustments  | **$ (58)**    | $ (1,629) |
| Unrealized gains on marketable securities | **--  ** | 96        |
| Accumulated other comprehensive income    | **$ (58)**    | $ (1,533) |

*New Accounting Pronouncements.* In November 2004, the Financial Accounting StandardsBoard ("FASB") issued Statement of Financial Accounting Standards("SFAS") No. 151 "Inventory Costs-an amendment of ARB No. 43,Chapter 4" ("FAS 151").  FAS 151 clarifies the accounting forabnormal amounts of idle facility expense, freight, handling costs, and wastedmaterial (spoilage) to require that these items be included as current-periodcharges and not included in overhead.  In addition, FAS 151 requires thatallocation of fixed production overheads to the costs of conversion be based onthe normal capacity of the production facilities.  The provisions in FAS 151are effective for inventory costs incurred during fiscal years beginning afterJune 15, 2005.  We have adopted FAS 151 for the fiscal year beginning January1, 2006 and are estimating $900,000 to $1.0 million of idle facility costs in2006 which will be recorded as current period costs in general andadministrative expenses.  The upcoming adoption of FAS 151 coincides with thegeneration of excess plant capacity resulting from the completion of the Pfizercontract in December 2005.  

InDecember 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-BasedPayment" ("FAS 123R"), which revises and replaces SFAS No. 123,"Accounting for Stock-Based Payment" and supersedes APB Opinion No.25, "Accounting for Stock Issued to Employees".  FAS 123R requiresthe measurement of all share-based payments to employees, including grants ofemployee stock options, using a fair-value based method and the recording ofsuch expense in our consolidated statements of operations.  The pro-formadisclosures previously permitted under SFAS No. 123 will no longer be analternative to financial statement recognition.  The provisions of FAS 123Rwere to have been effective for reporting periods beginning after June 15,2005.  At the end of March, the SEC staff released Staff Accounting BulletinNo. 107 (SAB 107), providing guidance for implementing FASB Statement No. 123(revised 2004), *Share-Based Payment* (Statement 123R).  Subsequently, theCommission delayed the implementation dates for Statement 123R to the start ofa Company's fiscal year.  As a result, we will be required to comply with theprovisions of FAS 123R beginning January 1, 2006.  Based upon informationavailable we are expecting net income to be reduced by approximately $570 in2006 related to additional compensation expense for outstanding stock optionsand issuances under our Employee Stock Purchase Plan using the modifiedprospective application.  

InMay 2005, the FASB issued SFAS No. 154 "Accounting Changes and ErrorCorrections-a replacement of APB Opinion No. 20 and FASB Statement No. 3"("FAS 154").  FAS 154 requires retrospective application to priorperiods' financial statements of changes in accounting principle, unless it isimpracticable to determine either the period-specific effects or the cumulativeeffect of the change.  When it is impracticable to determine theperiod-specific effects of an accounting change on one or more individual priorperiods presented, FAS 154 requires that the new accounting principle beapplied to the balances of assets and liabilities as of the beginning of theearliest period for which retrospective application is practicable and that acorresponding adjustment be made to the opening balance of retained earningsfor that period rather than being reported in an income statement.  When it isimpracticable to determine the cumulative effect of applying a change inaccounting principle to all prior periods, then FAS 154 requires that the newaccounting principle be applied as if it were adopted prospectively from theearliest date practicable.  The provisions of FAS 154 are effective foraccounting changes and corrections of errors made in fiscal years beginningafter December 15, 2005.

In May 2005, the FASB issuedFASB Staff Position No. EITF 00-19-1 "Application of EITF Issue No. 00-19to Freestanding Financial Instruments Originally Issued as Employee Compensation"("FSP EITF 00-19-1").  FSP EITF00-19-1 provides guidance on how toassess whether an issuer has the ability to control the form of settlement foroptions and share

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

rightsoriginally issued as employee compensation.  When these options and sharesoriginally issued as employee compensation can only be settled by deliveringregistered shares, then FSP EITF 00-19-1 nullifies the provisions of EITF 00-19that require the assumption of cash settlement and thus classified as an assetor liability.  The terms of such instruments are to be evaluated usingparagraph 34 of FAS 123R to determine whether they should be recorded as equityor liabilities.  The guidance in FPS EITF 00-19-1 is applied in accordance withthe effective date and transition provisions of FAS 123R.

## In February 2006, the FASBissued SFAS No. 155 "Accountingfor Certain Hybrid Financial Instruments-an amendment of FASB Statements No.133 and 140" ("FAS 155").  FAS 155 addresses the following: a) permits fair value remeasurement for any hybrid financialinstrument that contains an embedded derivative that otherwise would requirebifurcation; b) clarifies which interest-only strips and principal-only stripsare not subject to the requirements of Statement 133; c) establishes arequirement to evaluate interests in securitized financial assets to identifyinterests that are freestanding derivatives or that are hybrid financialinstruments that contain an embedded derivative requiring bifurcation; d)clarifies that concentrations of credit risk in the form of subordination arenot embedded derivatives; and e) amends Statement 140 to eliminate theprohibition on a qualifying special-purpose entity from holding a derivativefinancial instrument that pertains to a beneficial interest other than anotherderivative financial instrument. FAS 155 is effective for allfinancial instruments acquired or issued after the beginning of an entity'sfirst fiscal year that begins after September 15, 2006.  We are currentlyevaluating the requirements of FAS 155, but do not expect that the adoptionwill have a material effect on our financial statements. 

________________________________________________________________________________________________

**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 2005 are eligible to make anadditional catch up contribution in the amount of $4,000, subject to incomelimitations.  We match employee contributions for an amount up to 50% of theemployee's deferral limited to the first 6% of each employee's compensation. Contributions made by the Company were $357 in 2005, $351 in 2004, and $378 in2003.

________________________________________________________________________________________________

**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 as lettersof credit or bank guarantees, whenever deemed necessary.  Our managementbelieves that any risk of loss is significantly reduced due to the nature ofthe customers and distributors with which we do business.

________________________________________________________________________________________________

**4.  Accrued Expenses**

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

|  |                                                  | **2005**     | 2004    |
|--|--------------------------------------------------|--------------|---------|
|  | Payroll related  (including  accrued bonus) | **$ 1,487**  | $ 2,200 |
|  | Income taxes payable                             | **222**      | 365     |
|  | Property and equipment  accruals                 | **143**      | 1,503   |
|  | Product royalties and  distributor fees          | **1,515**    | 2,240   |
|  | Cost of sales outsourcing                        | **-- ** | 671     |
|  | Legal & professional  accruals               | **526**      | 532     |
|  | Local sales and VAT taxes                        | **61**       | 249     |
|  | Other                                            | **1,016**    | 1,190   |
|  |                                                  | **$ 4,970**  | $ 8,950 |

_______________________________________________________________________________________________

**5. Inventory**

We maintain a physical inventory of chemical compoundlibraries in various states of completion for LeadQuest, LeadDiscovery andcustomer-specific chemistry research projects.  Costs associated with themanufacture of compounds are calculated using the standard cost method and arecarried at the lower of cost (standard cost method approximating FIFO) ormarket.  Compounds that are acquired from third parties are also carried at thelower of cost or market.  In calculating the reserve for obsolescence,collections of compounds are reviewed for their age, possible chemicaldegradation and cumulative sales trends, and if necessary, a reserve provisionis made so that the carrying value is at or below the respective net realizablevalues.  If there is, in our opinion, a significant adverse deviation in salestrends for a specific compound collection or library, an additional reserveprovision is taken.  Aportion of the inventory is used in discovery research projects.  Depreciationof this portion of the inventory is recorded in the reserve for obsolescenceover its 10-year expected useful life.  Workin process and finished goods inventory includes the accumulated cost ofcompounds in production or awaiting shipment to customers under discoveryresearch or custom synthesis contracts.  Inventory balances at December 31 are:

|  |                                                | **2005**          | 2004           |
|--|------------------------------------------------|-------------------|----------------|
|  | Raw materials                                  | **$ 1,763 ** | $ 2,124   |
|  | Work in process                                | **3,339 **   | 6,594     |
|  | Finished goods                                 | **3,217 **   | 6,815     |
|  | Reserve for obsolescence                       | **(3,164)**       | (3,526)        |
|  |      Total  Inventory | **$ 5,155 ** | $ 12,007  |

|  | Costs of discovery research  projects included in                 |                      |                    |
|--|-------------------------------------------------------------------|----------------------|--------------------|
|  |     Work  in Process and Finished Goods above | **$ 534 ** | $ 7,468  |

________________________________________________________________________________________________

**6.**  **Property and Equipment**

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

|  |                                       | **2005 **    | 2004     |
|--|---------------------------------------|-------------------|---------------|
|  | Computer equipment                    | **$ 4,731 ** | $ 4,766  |
|  | Furniture & laboratory  equipment | **15,872 **  | 15,248   |
|  | Purchased software for  internal use  | **1,810 **   | 1,647    |
|  | Land                                  | **1,591 **   | 1,591    |
|  | Leasehold improvements                | **129 **     | 129      |
|  | Buildings                             | **21,629 **  | 21,485   |
|  |                                       | **45,762 **  | 44,866   |
|  | Less accumulated  depreciation        | **(18,973)**      | (14,194)      |
|  | Net property and equipment            | **26,789 **  | 30,672   |

________________________________________________________________________________________________

**7. Other Income, Net**

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

|  |                                | **2005**           | 2004       | 2003               |
|--|--------------------------------|--------------------|------------|--------------------|
|  | Foreign currency gain  (loss)  | **$ (1,121)** | $ 552 | $ 3,094  |
|  | Gain (loss) on sale of  assets | **(26)**           | 15         | (7)                |
|  | Miscellaneous                  | **(4)**            | 176        | (64)               |
|  |                                | **$ (1,151)** | $ 743 | $ 3,023  |

________________________________________________________________________________________________

**8. Lease Obligations**

Welease certain office facilities and equipment under noncancelable operating andcapital leases with terms from one to ten years.  The capital leasesspecifically pertain to the acquisition or financing of certain laboratory andcomputer equipment totaling $11,297.  In June 2005, we sold certain equipmentat our research laboratory and leased the equipment back under a three-year capitalfinancing lease.  The proceeds received of $2.0 million were equal to the netbook value of the equipment, resulting in no gain or loss on the transaction,and were recorded as a capital lease liability.  The equipment is stillactively utilized in our operations, remains on our books and continues to bedepreciated.  Quarterly payments go to reduce the capital lease liability.  Thetotal accumulated amortization associated with equipment under capital leaseswas approximately $7,310 and $3,846 at December 31, 2005 and 2004,respectively.  The related amortization expense is included in depreciationexpense.  Rent expense under the operating leases was $1,081, $1,118 and $871in 2005, 2004, and 2003, respectively.** **Noncancelable future minimumlease commitments as of December 31, 2005 are: 

| Year                                         |  | **Operating Leases** | **Capital Leases**  |
|----------------------------------------------|--|----------------------|---------------------|
| 2006                                         |  | $ 748                | $ 2,956   |
| 2007                                         |  | 544                  | 1,149     |
| 2008                                         |  | 324                  | 375       |
| 2009                                         |  | 283                  | --        |
| 2010                                         |  | 274                  | --        |
| Thereafter                                   |  | 309                  | --        |
| Total payments                               |  | $ 2,482              | 4,480     |
| Less amount representing  interest           |  |                      | (396)               |
| Noncancelable future minimum  lease payments |  |                      | $ 4,084   |

Includesthe current portion of capital lease obligations of $2,741

Includedin the capital lease future minimum lease commitments are payments of $749 in2006 and 2007 and $375 in 2008 related to the sale leaseback described above.

________________________________________________________________________________________________

**9. 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 ofOperations for the change in currency rates.  Gains and losses on foreigncurrency exchange contracts are included in other income (expense) net.  Thecounter-party to these foreign currency hedge contracts is LaSalle N.A.  AtDecember 31, 2005 and 2004 there were no foreign currency future contracts inplace. 

________________________________________________________________________________________________

**10.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 awarded GBP1,300 tied to costs to construct thelaboratory.  At December 31, 2002, TDR had met all criteria for the firstinstallment of the DTI grant and was approved to receive a payment of GBP550that was recorded in 2002.  Approximately GBP99 of the payment was attributedto the reduction of expenses while the remainder was treated as a reduction inthe cost of capital expenditures.  During 2003, TDR achieved multiplethresholds under the South West of England Regional Development Agency grantand made claims of GBP1,300 which were recorded as reductions in the amounts ofcapital expenditures.  In 2004, the second installment of the DTI grant wasapproved and a payment was received for GBP990.  Approximately GBP205 of thepayment was attributed to reduction in expenses while the remaining GBP785 wasrecorded as a reduction of our capital expenditures.  At December 31, 2004,GBP860 remained to be awarded if certain criteria are met.  During 2005 we didnot meet the criteria to receive additional grant funding.  The grant from theDTI expires on December 31, 2006 if not claimed.  Additionally, for a period ofup to 24 months after our last draw under the grant programs, we are obligatedto repay portions or all of the grant money received if we eliminate jobs orexit the property.  On December 19, 2005, we issued a press release announcingthat that we intended to streamline our Discovery Research business andinitiated a 30-day consultation period with employees mandated by U.K. law when job losses are expected to be in the range of 20 to 99 positions. Calculation of any amounts repayable to the U.K. government are based onemployee staffing levels at December 31, 2006. The Company is not able toestimate any potential liability at this time as staffing levels may continueto fluctuate.  See additional discussion under Note 26, "Subsequent Event" andNote 25 "Contingent Liability."

In early 2005, Tripos was awarded an$850 phase II Small Business Innovation Research (SBIR) grant from the U.S. NationalInstitutes of Health (NIH).  The two-year grant will help fund creation of afull-scale library design system.  Based on topomer technology, thisproprietary system will have the capacity to search more than one million timesthe number of structures previously possible, providing a richer universe ofsynthetic chemistries.  Scientists will be able to extend their knowledge ofsimilar molecules, resulting in improved success rates for all stages of drugdiscovery.  This system which will initially be used at the Company's ownchemistry laboratory in the U.K., also has the potential to be licensed toother drug discovery research operations under the appropriate technologytransfer agreements.  As of December 31, 2005, the Company had recorded $387 ofgrant funding as revenue and a corresponding amount has been reclassified fromR&D expenses to cost of sales, representing staff time spent on the project.

________________________________________________________________________________________________

**11. Time-based Software License Arrangements**

Certain time-based software license arrangements arecovered by non-cancelable agreements whose terms range from one to five years. The typical term of the contracts is three years.  Revenue from these time-basedlicense arrangements is recognized ratably over the agreed term.  The followingtable shows the amount of future revenues to be recognized from thesenon-cancelable arrangements as of December 31, 2005.

|  | Revenues to be recognized in:           | Amount        |
|--|-----------------------------------------|---------------|
|  |    2006                  | $ 15,701 |
|  |    2007                  | 6,866         |
|  |    2008                  | 949           |
|  |    2009 & Thereafter | 80            |
|  | Total                                   | $ 23,596 |

Tripos is typically paid annually under thesecontracts.  Shown below are the amounts to be billed under these contractssubsequent to December 31, 2005 (amounts not included in the accompanyingbalance sheets at December 31, 2005).

|  | Amounts to be billed in: | Amount        |
|--|--------------------------|---------------|
|  |    2006   | $ 7,926  |
|  |    2006   | 2,444         |
|  |    2007   | 92            |
|  | Total                    | $ 10,462 |

______________________________________________________________________________________________

**12. Goodwill and Other Intangible Assets**

At December 31, 2005 andDecember 31, 2004, the Company had the following intangible asset balances: 

|                        | **December 31, 2005** |            | December 31, 2004 |
|------------------------|-----------------------|------------|-------------------|
|                        | **Gross**             | ** ** | ** **        |  | Gross |  |  |
|                        | **Carrying**          | ** ** | **Accumulated**   |  | Carrying |  | Accumulated |
|                        | **Amount**            | ** ** | **Amortization**  |  | Amount |  | Amortization |
| Acquired software      | **$3,590**            | ** ** | **$382 **    |  | $ -- |  | $ -- |
| Non-compete agreements | **350**               | ** ** | **92 **      |  | -- |  | -- |
| Patents and trademarks | **192**               | ** ** | **104 **     |  | 183 |  | 93 |
| Total                  | **$ 4,132**      | ** ** | **$578 **    |  | $ 183 |  | $ 93 |

Amortized intangible assets have the followingweighted average useful lives as of December 31, 2005: 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 $485 and $10 for the years ended December 31, 2005 and 2004,respectively.  Estimated annual amortization expense for the next 5 years is:2006 - $486; 2007 - $476; 2008 - $475; 2009 - $391 and 2010 - $9.

The changes in thecarrying amount of goodwill for the twelve months ended December 31, 2005 areas follows:

|                                           |  | Discovery    |  | Discovery        |  |                    |
|-------------------------------------------|--|--------------|--|------------------|--|--------------------|
|                                           |  | Informatics  |  | Research         |  | Total              |
| Balance at December  31, 2004             |  | $ --    |  | $ 965  |  | $ 965    |
| Acquisition of Optive  Research, Inc.     |  | 4,308        |  | --          |  | 4,308         |
| Foreign currency  translation adjustments |  | --           |  | (18)             |  | (18)               |
| Balance at December  31, 2005             |  | $ 4,308 |  | $ 947  |  | $ 5,255  |

The goodwill amountsshown above are not tax deductible.

In accordance with the provisions of StatementNo. 142, "Goodwill and Other Intangible Assets", the Company performed formal impairment tests of goodwill in 2005 and2004 by using a discounted cash flow approach to estimate fair value.  Based onour evaluations, we determined there was no impairment of the remaininggoodwill.  We will continue to do so on an annual basis and between annualtests if an event occurs or circumstances change that would more likely thannot reduce the fair value of Tripos Discovery Research Ltd. or Optive Research,Inc. below their respective carrying values.

________________________________________________________________________________________________

**13. Relationship with Accenture LLP.**

OnFebruary 8, 2002, we entered into a marketing alliance agreement with AccentureLLP intended to market and sell a fully integrated solution to automate drug discoveryoperations of the largest global pharmaceutical companies.  As part of thisarrangement, we issued 33 shares of common stock, valued at $1.0 million, toAccenture upon entry into this arrangement.  This upfront fee paid to Accenturewas in consideration of the marketing effort to be expended by Accenture overthe term of the relationship.  The fee covered the development of jointmarketing materials, a joint product demo presentation, and marketing time andeffort on behalf of Accenture.  We applied EITF 96-18 *Accounting for EquityInstruments That Are Issued to Other Than Employees for Acquiring, or inConjunction with Selling, Goods or Services*.  In applying EITF 96-18, sincethe $1.0 million of our stock was granted to Accenture at the inception of thecontract in exchange for three years of marketing services and the stock isnon-forfeitable and fully vested we determined that the date of issuance of theequity securities is the appropriate measurement date.  Accordingly, werecorded the equity issuance and an "Other Asset" at the contractinception date, based on the fair value of the stock issued.  Performance ofthe services was required over the contractual term, therefore we amortized theOther Asset ratably over the contractual term as a sales and marketingexpense.  Total expense recorded in the years ended December 31, 2005, 2004 and2003 related to the arrangement was $22, $265 and $265, respectively.

________________________________________________________________________________________________

**14. Earnings Per Share**

** **

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

|              |                                                                                                            | **2005**                       |  | 2004       |  | 2003         |
|--------------|------------------------------------------------------------------------------------------------------------|--------------------------------|--|------------|--|--------------|
| Numerator:   |                                                                                                            |                                |  |            |  |
|              | Numerator  for basic and diluted earnings per share-

-net  income (loss) allocable to common shareholders | ** **

**$ (4,288)** |  | $ 232 |  | $ 2,100 |
| Denominator: |                                                                                                            | ** **                     |  |            |  |
|              | Denominator  for basic earnings per share-

-weighted  average shares                                      | ** **

**10,096 **   |  | 9,206      |  | 8,949        |
|              | Effect  of dilutive securities:                                                                            | ** **                     |  |            |  |              |
|              |     Employee  stock options  (Note A)                                             | **-- **                   |  | 151        |  | 384          |
|              | Denominator  for diluted earnings per share-

-adjusted  weighted average shares and assumed conversions   | ** **

**10,096 **   |  | 9,357      |  | 9,333        |
|              | Basic  earnings per share                                                                                  | **$(0.42)**                    |  | $0.03      |  | $0.23        |
|              | Diluted  earnings per share                                                                                | **$(0.42)**                    |  | $0.02      |  | $0.23        |

NoteA: For the year ended December 31, 2005, weighted average shares outstandingwere not adjusted for the effect of outstanding employee stock options as theirinclusion would have been anti-dilutive.

_______________________________________________________________________________________________

**15. 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 is restricted and will vest evenly on a semi-annual basis over 2 years) and $4,770 in cash to Optive's former
```

```
 shareholders.  The value of the shares issued was computed based on the average closing stock price of our 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.  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.

________________________________________________________________________________________________

**16. Income Taxes**

Thecomponents of income (loss) before income taxes for the years ended were asfollows:

|            |          | **2005**            | 2004          | 2003          |
|------------|----------|---------------------|---------------|---------------|
| ** ** | Domestic | **$ (2,237) ** | $ (3,919)     | $ 3,949  |
|            | Foreign  | **(4,121) **   | 6,161    | (280)         |
|            |          | **$ (6,358) ** | $ 2,242  | $ 3,669  |

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

|                                 |                                  | **2005**              | 2004              | 2003             |
|---------------------------------|----------------------------------|-----------------------|-------------------|------------------|
| Current tax expense  (benefit)  |                                  |                       |                   |                  |
|                                 | Federal                          |  **$ 101 ** |  $  480 |  $ --  |
|                                 | State and local                  | **6 **           | --                | --          |
|                                 | Foreign                          | **(266)**             | 330               | 271         |
|                                 |     Total current | **(159)**             | 810               | 271         |
| Deferred tax expense  (benefit) |                                  | **(1,911)**           | 1,200             | 1,298       |
|                                 | Total provision                  | **$ (2,070)**         | $ 2,010           | $ 1,569     |
|                                 |                                  |                       |                   |                  |  |

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

|  |                                                      | **2005**           |       | 2004            |   | 2003       |   |
|--|------------------------------------------------------|--------------------|-------|-----------------|---|------------|---|
|  | Tax at U.S. federal statutory rate                   | **34.0 **     | **%** | 34.0       | % | 34.0  | % |
|  | Effect of foreign  operations (net of foreign taxes) | **(2.8)**          |       | (10.0)          |   | 5.6   |   |
|  | Foreign withholding tax                              | ** -- ** |       | 2.3        |   | --    |   |
|  | State taxes, net of federal  benefit                 | **(0.1)**          |       | 4.9        |   | 4.0   |   |
|  | R&D tax credits                                  | **1.6 **      |       | (1.6)           |   | (1.1)      |   |
|  | Valuation allowance                                  | **(52.0)**         |       | 50.4       |   | (0.9)      |   |
|  | Permanent differences (1)                            | **51.9 **     |       |  9.6  |   | 1.2   |   |
|  | Effective tax rate                                   | **32.6 **     | **%** | 89.6       | % | 42.8  | % |

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

|                                                    |                                                                | **2005**             | 2004            |
|----------------------------------------------------|----------------------------------------------------------------|----------------------|-----------------|
| Current deferred income tax  asset (liability):    |                                                                |                      |
|                                                    | Allowance for doubtful  accounts                               | **$ 65 **  | $ 69  |
|                                                    | Vacation accrual                                               | ** 197 **  |  189  |
|                                                    | Deferred revenue                                               | **382 **        | 1,539      |
|                                                    | Other                                                          | **278 **        | 119        |
|                                                    | Unrealized gain on  marketable securities                      | **-- **         | (58)            |
|                                                    | Valuation allowance                                            | **(922)**            | (1,829)         |
|                                                    |                                                                | **$ -- **  | $ 29  |
| Noncurrent deferred income  tax asset (liability): |                                                                |                      |
|                                                    | Capitalized development  costs                                 | **$ (864)**     | $ (823)    |
|                                                    | Property, equipment and  other long-lived assets               | **(5,328)**          | (5,560)         |
|                                                    | NOL carryforward                                               | **12,851 **     | 8,545      |
|                                                    | Cumulative unpaid  inter-company interest                      | **226 **        | 355        |
|                                                    | Unrealized loss on  investments in unconsolidated subsidiaries | **349 **        | 272        |
|                                                    | Tax credit carryforward                                        | **1,373 **      | 948        |
|                                                    | Valuation allowance                                            | **(8,376)**          | (5,446)         |
|                                                    |                                                                | **$ 231 ** | $ (1,709)  |
|                                                    |                                                                |                      |                 |  |

(1) Permanentdifferences for 2005 include prior years R&D tax credits in the U.K. thatwere not able to be recognized until such time as it was more likely than notthat they would be approved by the tax authorities.

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 2004 and 2005,additional valuation allowances were applied to the current year increase indeferred tax assets primarily from losses generated in the United States and United Kingdom operations.  

**16.  Income Taxes (continued)**

There are $613 of taxbenefits from stock option exercises with offsetting valuation allowances thatupon realization will be credited to additional paid-in-capital.  Under the newAmerican Jobs Creation Act of 2004, the carryforward period for foreign taxcredits has been extended to 10 years.  Therefore the foreign tax credits willexpire in 2011 and 2012.  R&D credits generated before 1998 have a 15-yearcarryforward period and a 20-year period for credits arising after 1997. Therefore the R&D credits will expire between 2011 and 2024.

Income tax payments for 2005, 2004 and 2003 were $25,$217 and****$4, respectively.  Tripos' U.K. subsidiaries had group losscarryforwards at December 31, 2005, with a pre-tax value of approximately$24,346 that have no expiration date.  Additionally, Tripos' U.S. entity had loss carryforwards of $14,300 on a pre-tax basis that expire between 2022 and 2025. At December 31, 2005, there were no undistributed earnings from our foreignsubsidiaries. 

________________________________________________________________________________________________

**17. 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.

**________________________________________________________________________________________________**

**18. 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 invests in new and developing companies in the life science sector. Our investment commitment of $2,500 represents approximately 2.0% of the totalcapital of the fund.  As of December 31, 2005 we had invested $2,075 or 83% ofour total commitment.  In 2004 we received a distribution of 33 shares ofNuVasive, Inc. from the fund manager upon NuVasive's initial public offering. The value of these shares, $341 as of December 31, 2004 was recorded asmarketable securities.  During 2005, we sold all 33 shares of NuVasive, Inc, realizinga gain of $240.  In July 2005 we received a distribution from the fund in theform of $319 cash and shares in Cerexa, Inc. valued at $14.  As a result ofthis transaction, we recognized a gain in the amount of $305.

The fund records investment impairments whenidentified, for which we recognize our pro-rata share of such impairments.  In2005, 2004 and 2003, the fund's managers determined that certain investmentswere impaired, and we recorded our pro-rata share of the fund's investmentimpairments, totaling $204, $58 and $110, respectively.  Our net investmentbalance in the A.M. Pappas Life Science Ventures II Fund at December 31, 2005totals $1,504, reflected in Investments recorded at cost on the balance sheet.

________________________________________________________________________________________________

**19. 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.  Our investmentin the shares is recorded in the balance sheet under "Investments" at cost.

________________________________________________________________________________________________

**20. Investment in Arena Pharmaceuticals, Inc.**

** **

During the period from 1997 through 1999, we invested inthe start up of Arena Pharmaceuticals, Inc. ("Arena"), a San Diego, California biotechnology company.  Our investment in Arena totaled $3,200.  InJuly of 2000, Arena successfully completed its initial public offering("IPO") of common stock on the NASDAQ market.  During June 2001, Arenacompleted a secondary offering of additional shares of common stock.  Weparticipated in the offering by selling 100 shares and realizing a pre-tax gainof $2,387.  During 2002 we sold 619 shares under a controlled sale programrealizing a pre-tax gain of $3,560.  Again in 2003, we sold 1,266 shares ofArena and realized a pre-tax gain of $6,659.  Finally, in 2004 we sold ourremaining 31 shares, realizing a pre-tax gain of $144.

________________________________________________________________________________________________

**21.Investment in Signase, Inc.**

During 2001 and 2002 Tripos made in-kindcontributions of chemical compounds in exchange for shares of Signase, Inc., aTexas-based biotechnology company that researches cancer therapeutics.  The transactionswere recorded as an increase in investments in unconsolidated affiliates andsales of chemical compounds.  Valuation of the shares received was consistentwith recent equity placements of similar shares to other investors by Signase. The $500 sales value of the chemical compounds was consistent with averagemarket values received in comparable transactions from other customers forsimilar volumes of compounds sold from our existing inventory.  

Early in 2003, Signase advised its shareholdersof its intent to seek additional financing at rates below those of the originalinvestors.  We determined this reduced level of market value to be "otherthan temporary" and as a result, wrote down our investment to approximatethe then current offering price.  Our total in-kind investment was $552 priorto the write-down of $405 in 2002, leaving a carrying value of $150.  Tripostook a further write-down of the remainder of its investment in Signase, $150,as of March 31, 2003, after receiving information from Signase that attempts toraise capital were unsuccessful and that the company may be liquidated.  Signasewas liquidated during 2005 with no proceeds being realized byshareholders, including Tripos. 

_______________________________________________________________________________________________

**22. Long-term Debt**

Asof December 31, 2005, we had a credit agreement with LaSalle Bank N.A. for a$3,697 mortgage note for property with a book carrying value of $3,926.  Themortgage is due to mature on April 18, 2008.  We also had a $6,500 one-yearrevolving line of credit agreement with LaSalle Bank.  The Bank has committedto amend the line of credit facility to $6,000 and extend it to January 01, 2007. Both credit agreements are collateralized by substantially all of our U.S. assets and stock pledges for each of the U.S. and U.K. subsidiaries.  Payment of dividends tostockholders or the incurring of debt from other sources by Tripos, Inc. andits subsidiaries must be approved in advance by LaSalle Bank.  The agreementsalso required us to meet certain financial covenants, including minimum debtservice coverage, minimum shareholders' equity, maximum capital expenditure(excluding the chemistry laboratory expansion) and an annual clean-down periodof 30 consecutive days in which no borrowings are outstanding on the revolvingcredit facility.  We met the annual "clean down" provision for the current yearin September 2005.  As of December 31, 2005, Tripos was in violation of theminimum debt services coverage and minimum shareholders' equity covenants ofits loan agreement with LaSalle Bank.  The bank has waived these violations asof December 31, 2005.  The amended line of credit will have a borrowing base of85% of domestic and insured foreign accounts receivable plus $1.8 million allowancefor excess equity in U.S. real estate, a revised minimum shareholders' equitycovenant tested quarterly and a minimum consolidated cash balance covenanttested monthly.  The annual clean-down requirement was eliminated. 

The mortgage note under the credit agreement calls foreven 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 5.5% during2005.  At December 31, 2004 the balance owed on the mortgage note of $3,914 waspresented as a current liability on the balance sheet since at the time it wasdue within a one-year period.  The $6,000 revolving line of credit under thecredit agreement requires quarterly interest-only payments with any remainingborrowings due at the end of the agreement period.  The line of credit carriesa commitment fee of 3/8% of the unused portion of the line.  Borrowings underthe revolving line of credit bear interest at variable rates tied to LIBOR orthe bank's prime rate.  We averaged $2,418 of outstanding borrowings during2005.  The weighted average interest rate on line of credit borrowings was 6.5%in 2005.

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

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 repayment terms ofthe promissory note require monthly interest only payments of $33 for the first18 months, followed by 30 monthly payments of $135 beginning on August 1,2006.  Each payment of principal will be accompanied by payment of accrued butunpaid interest to the date of the payment.  The subordinated promissory notecontains 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 purchasecommon stock 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 are being amortized tointerest expense over the life of the loan.

Short-termdebt obligations were:

|  |                                                | **December 31, 2005** | December 31, 2004 |
|--|------------------------------------------------|-----------------------|-------------------|
|  | Borrowings outstanding  under Credit Agreement | **$ 4,400 **     | $ 600             |
|  | Mortgage note                                  | **218 **         | 3,914             |
|  | Subordinated debt                              | **623 **         | --           |
|  |  Short-term debt                          | **$ 5,241 **     | $ 4,514           |

Long-termdebt obligations were:

|  |                            | **December 31, 2005** | December 31, 2004  |
|--|----------------------------|-----------------------|--------------------|
|  | 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 are $5,240 in2006, $1,574 in 2007, $4,650 in 2008 and $133 in 2009, consisting of mortgagenote maturities of $217 in 2007 and $3,263 in 2008 along with subordinated debtmaturities of $1,357 in 2007, $1,387 in 2008 and $133 in 2009.  Interestexpense incurred, net of capitalized interest, for the years ended December 31,2005, 2004 and 2003 were $837, $265 and $515, respectively, while totalinterest payments, inclusive of capital lease interest, were $1,668, $1,116 and$769, respectively.

________________________________________________________________________________________________

**23.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 operates has two reporting segments, Discovery Informatics andDiscovery Research.  The Company's Discovery Informatics segment designs, orin-licenses, and sells licenses to software suites that provide computer-aidedmolecular modeling and visualization, virtual screening, combinatorial librarydesign, data storage and analysis, and structure-activity relationships tocustomers in pharmaceutical, biotechnology and related life science fields ofresearch.  The Company's Discovery Research segment provides drug discoveryservices to pharmaceutical and biotechnology companies.  High-end servicesoffered are based on application by Tripos of its proprietary high-throughputcombinatorial chemistry, and our ChemSpace database searching and selectiontechnologies, including the LeadHopping method for quick identification ofalternative chemistries for customer's needs. 

**23. Segment Information(continued)**

Summarized financialinformation concerning the industry segments follows:

**DI** = Discovery Informatics     **DR**= Discovery Research

|                                                             | ** **                        |
|-------------------------------------------------------------|-----------------------------------|
|                                                             | **Years Ended December 31,** |
|                                                             | **2005**                          |  | 2004 |  | 2003 |
|                                                             | ** DI**                      | DR | Total |  | DI | DR | Total |  | DI | DR | Total |
| Revenues:                                                   |                                   |  |  |  |  |  |  |  |  |  |  |
| DI products                                                 | **$24,905**                       | **$       -- ** | **$24,905 ** |  | $24,770 | $       -- | $24,770  |  | $24,662 | $       -- | $24,664  |
| DI services                                                 | **3,076**                         | **-- ** | **3,076 ** |  | 4,005 | -- | 4,005  |  | 3,241 | -- | 3,241  |
| DR products & services                                  | **--**                            | **27,440 ** | **27,440 ** |  | -- | 36,004 | 36,004  |  | -- | 26,245 | 26,245  |
| Total revenues                                              | ** **

**$27,981**           | ** **

**$27,440 ** | **$55,421 ** |  | $28,775 | $36,004 | $64,779  |  | $27,903 | $26,245 | $54,148  |
|                                                             |                                   |  |  |  |  |  |  |  |  |  |  |
| Depreciation &  amortization (2)                        | **$3,047**                        | **$3,898 ** | **$6,945 ** |  | $2,208 | $2,867 | $5,075  |  | $1,507 | $1,939 | $3,446  |
| Non-allocated corporate (2)                                 | ** **                        | ** ** | **294 ** |  |  |  | 437  |  |  |  | 404  |
| Depreciation &  amortization on statement of operations | ** **                        | ** ** | **$7,239 ** |  |  |  | $5,512  |  |  |  | $3,850  |
|                                                             | ** **                        | ** ** | ** ** |  |  |  |  |  |  |  |  |
| Operating income (loss)                                     | **$2,710**                        | **$(645)** | **$2,065 ** |  | $3,406 | $6,171 | $9,577  |  | $37 | $1,284 | $1,321  |
| Non-allocated corporate  departments                        | ** **                        | ** ** | **$(6,075)** |  |  |  | $(7,175) |  |  |  | $(6,766) |
| Operating income (loss) on  statement of operations         | ** **                        | ** ** | **$(4,010)** |  |  |  | $2,402  |  |  |  | $(5,445) |
|                                                             | ** **                        | ** ** | ** ** |  |  |  |  |  |  |  |  |
| Long-lived assets                                           | **$15,995**                       | **$21,894 ** | **$37,889 ** |  | $8,974 | $24,912 | $33,886  |  | $9,529 | $21,882 | $31,411  |
|                                                             | ** **                        | ** ** | ** ** |  |  |  |  |  |  |  |  |
| Total assets (1)                                            | **$31,470**                       | **$29,105 ** | **$60,575 ** |  | $25,304 | $43,306 | $68,610  |  | $27,223 | $41,527 | $68,750  |
| Consolidated cash                                           | ** **                        | ** ** | **6,241 ** |  |  |  | 4,512  |  |  |  | 2,945  |
| Total assets on balance  sheet                              | ** **                        | ** ** | **66,816 ** |  |  |  | 73,122  |  |  |  | 71,695  |

*(1)     Excludescash and certain marketable securities of $6,241, $4,512 and $2,945,respectively that are monitored on a consolidated basis. *

*(2)***     ***Certain prior yeardepreciation and amortization amounts have been reclassified to conform tocurrent year format.*****

**23. 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 2005, 2004 and 2003 is as follows:

|                 | **United States** | **Canada** | **Europe**   | **Pacific Rim** | **Total**    |
|-----------------|-------------------|------------|--------------|-----------------|--------------|
| 2005 Net sales  | **$ 12,870**      | **$ 794**  | **$ 38,966** | **$ 2,791**     | **$ 55,421** |
|                 |                   |            |              |                 |              |
| 2004  Net sales | 12,751            | 470        | 48,699       | 2,859           | 64,779       |
|                 |                   |            |              |                 |              |
| 2003  Net sales | 13,595            | 343        | 36,509       | 3,701           | 54,148       |

|                                           | **United States** | **Canada**    | **Europe**        | **Pacific Rim** | **Total**         |
|-------------------------------------------|-------------------|---------------|-------------------|-----------------|-------------------|
| **2005**                                  |                   |               |                   |                 |                   |
| **Property, plant &  equipment, net** | **$ 5,732**  | **$ --** | **$ 21,057** | **$ --**   | **$ 26,789** |
| **Capitalized  development costs, net**   | **2,291**         | **--**        | **--**            | **--**          | **2,291**         |
| **Goodwill,  net**                        | **4,308**         | **--**        | **947**           | **--**          | **5,255**         |
| **Intangible  assets, net**               | **3,554**         | **--**        | **--**            | **--**          | **3,554**         |
| **Long-lived  assets net**                | **15,885**        | **--**        | **22,004**        | **--**          | **37,889**        |
|                                           |                   |               |                   |                 |                   |
| 2004                                      |                   |               |                   |                 |                   |
| Property, plant &  equipment, net     | $ 6,521      | $ --     | $ 24,151     | $ --       | $ 30,672     |
| Capitalized  development costs, net       | 2,159             | --            | --                | --              | 2,159             |
| Goodwill,  net                            | --                | --            | 965               | --              | 965               |
| Intangible  assets, net                   | 90                | --            | --                | --              | 90                |
| Long-lived  assets net                    | 8,770             | --            | 25,116            | --              | 33,886            |
|                                           |                   |               |                   |                 |                   |
| 2003                                      |                   |               |                   |                 |                   |
| Property, plant &  equipment, net     | $ 6,706      | $--           | $ 21,209     | $ 11       | $ 27,926     |
| Capitalized  development costs, net       | 2,417             | --            | --                | --              | 2,417             |
| Goodwill,  net                            | --                | --            | 965               | --              | 965               |
| Intangible  assets, net                   | 103               |               |                   |                 | 103               |
| Long-lived  assets net                    | 9,226             | --            | 22,174            | 11              | 31,411            |

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.

Revenuesfrom Pfizer, utilizing products and services in each of our reporting segments,represents 46%, 54%, and 52% of our consolidated net revenues for 2005, 2004,and 2003 respectively.

________________________________________________________________________________________________

**24. 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, 2005, 339 shares have been purchased under this plan leaving 361shares 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 

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

andexpired during 2004.  The outstanding 1,366 options granted prior to theexpiration of the plan will remain outstanding until their exercise, expirationor forfeiture. 

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 417 options granted prior tothe expiration of the plan will remain outstanding until their exercise,expiration or forfeiture.

In 2005, we adopted the 2005 Equity IncentivePlan ("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 800,000shares are available for issuance under the 2005 Plan.  In addition, anyoutstanding options under the Company's 1994 Employee Stock Option Plan thatsubsequently expire unexercised, up to a maximum of 300,000 shares, may berecaptured issued under the 2005 Plan.  Under the 2005 Plan, the Administratormay grant nonqualified 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 vestingcriteria that 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. Performance shares may be granted to employees, consultants or directors at anytime as shall be determined by the Administrator in its sole discretion. Subject to the terms of the Plan, the Administrator will have completediscretion to determine the number of shares subject to a performance shareaward and the conditions that must be satisfied, which typically will be basedprincipally or solely on achievement of performance milestones but may includea service based component, upon which is conditioned on the grant or vesting ofperformance share.**** **Performance units are similar to performanceshares, except that they shall be settled in cash equivalent to the fair market value of the underlyingshares, determined as of the vesting date.  The shares available for issuanceunder the 2005 Plan shall not be diminished as a result of the settlement of aperformance unit.  Deferred stock units shall consist of a restricted stock,performance share or performance unit award that the Administrator, in its solediscretion, permits to be paid out in installments or on a deferred basis, inaccordance with rules and procedures established by the Administrator.  Adividend equivalent is a credit, payable in cash, awarded at the discretion ofthe Administrator, to the account of a participant in an amount equal to thecash dividends paid on one share for each share represented by an award.

Pro-formainformation regarding net income and earnings per share is required by SFAS 123and has been determined as if we had accounted for employee and director stockoptions under the fair value method of that Statement (see Note 1).  The fairvalue for these options was estimated at the date of grant using aBlack-Scholes option pricing model with the following weighted averageassumptions: risk-free interest rates ranging from 3.0% to 4.5% for 2005, 1.46%to 4.43% for 2004 and 1.10% to 4.23% for 2003; volatility factor of 0.63 for2005, 0.90 for 2004 and 0.97 for 2003; and a weighted average expected life ofthe option of 6.2 years for 2005, 5.3 year for 2004 and 5.3 years for 2003. For the Tripos Employee Stock Purchase Plan, compensation expense was alsoestimated using a Black-Scholes option pricing model with the following assumptions:risk-free interest rates 

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

rangingfrom 4.15% to 4.41% for 2005, 1.29% to 4.57% for 2004 and 1.10% to 4.23% for2003; volatility factors of 0.82 for 2005, 0.90 for 2004 and 0.97 for 2003; anda weighted average expected life of the option of 6 months.  For all yearspresented, we used a dividend rate of zero.

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**                                           |  | **2005**Shares               | Weighted Average Exercise Price |  | **2004**Shares | Weighted Average Exercise Price |  | **2003**Shares | Weighted Average Exercise Price |
|---------------------------------------------------------------------------|--|------------------------------|---------------------------------|--|----------------|---------------------------------|--|----------------|---------------------------------|
| Beginning outstanding                                                     |  | **1,783 **              | **$ 7.81**                      |  | 1,835     | $ 7.41                          |  | 1,806     | $ 7.60                          |
| Granted                                                                   |  | **331 **                | **3.29**                        |  | 272       | 5.85                            |  | 178       | 5.69                            |
| Exercised                                                                 |  | **(33)**                     | **2.17**                        |  | (248)          | 2.58                            |  | (46)           | 2.68                            |
| Canceled/expired                                                          |  | **(126)**                    | **6.39**                        |  | (76)           | 8.31                            |  | (103)          | 9.83                            |
|                                                                           |  | ** **                   | ** **                      |  |                |                                 |  |                |                                 |
| Ending outstanding                                                        |  | **1,955 **              | **$ 7.23**                      |  | 1,783     | $ 7.81                          |  | 1,835     | $ 7.41                          |
|                                                                           |  | ** **                   | ** **                      |  |                |                                 |  |                |                                 |
| Exercisable-end of year                                                   |  | **1,463 **              | **$ 8.09**                      |  | 1,315     | $7.81                           |  | 1,405     | $6.49                           |
|                                                                           |  | ** **                   | ** **                      |  |                |                                 |  |                |                                 |
| Weighted average fair value  per share of options granted during the year |  | ** **

**$ 1.71 ** | ** **                      |  | $ 4.01    |                                 |  | $ 4.08    |                                 |

| December 31, 2005        | 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**          | 363                 | 4.52                            | $ 3.28                          |  | 101 | $ 3.41 |
| **$3.81-$5.37**          | 469                 | 3.89                            | 4.32                            |  | 429 | 4.23 |
| **$5.37-$6.19**          | 386                 | 5.90                            | 5.86                            |  | 237 | 5.93 |
| **$6.19-$13.25**         | 424                 | 3.83                            | 8.41                            |  | 389 | 8.52 |
| **$13.25-$19.70**        | 313                 | 5.70                            | 16.23                           |  | 307 | 16.16 |
| **$2.94-$19.70**         | 1,955               | 4.68                            | $ 7.23                          |  | 1,463 | $ 8.09 |
|                          |                     |                                 |                                 |  |  |  |

________________________________________________________________________________________________

**25. Contingent Liability**

As discussed in Note 10, for a period of up to 24months after our last draw under the DTI grant programs, we are obligated torepay portions or all of the grant money received if we eliminate jobs or exitthe property.   On January 24, 2006 we reduced headcount as described in Note 26by seventy-six positions.  Calculation of any amounts repayable to the U.K. government is based on employee staffing levels at December 31, 2006.  Actual staffinglevels at that date will be compared to staffing levels previously funded bythe grant.  Any shortfall in actual staffing may require repayment to the DTIcalculated at a rate of GBP17 per employee up to a maximum amount of GBP1,500. The Company is not able to estimate any potential liability at this time asstaffing levels may continue to fluctuate throughout 2006.  

________________________________________________________________________________________________

**26. Subsequent Event**

```
On January 24, 2006 we completed a reduction in force for our Discovery Research
business based in Bude, England which was previously announced on December 19, 2005.
  This action coincided with the conclusion of the 30-day consultation period
with employees mandated by U.K. law.  We reduced the number of employees by 76
positions to streamline and refine our Discovery Research business and associated
cost structure as a result of our fourth quarter 2005 completion of the four-year $90 million
file enrichment project with Pfizer Inc.  Before this action was taken, our Discovery Research
business had 161 employees.  More than half of the employees affected left the Company
under a voluntary separation plan.  Severance packages and assistance with outplacement services
services were offered to all employees affected by this action.  As a result, we expect to
incur a restructuring charge in the first quarter of 2006 for approximately $900 for severance
and outplacement services.
```

Thecompany also closed a 6,000-square-foot temporary laboratory building in Budeand is exploring alternate uses for or disposition of the excess property.  AtDecember 31, 2005, we determined that this building was impaired and took animpairment charge of $861 reflected as "Restructuring charge" on our consolidatedstatements of operations.  Costs to dispose of the building or proceeds from apotential sale of the property are not determinable.  

________________________________________________________________________________________________

**27. 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 alleges 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 names 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 is $3,150 which is to be paid by our insurers.  The settlement issubject to court approval after notice and an opportunity to object is providedto the putative shareholder class.  There can be no assurance that thesettlement will be approved in which case, we will continue to defend ourselvesagainst these claims vigorously.  

*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 alleges 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 verbalagreement to settle this litigation, subject to final documentation and courtapproval, involving the implementation of certain policies and procedures bythe Company and the payment of attorneys' fees of $200 to plaintiffs' counsel. All fees are to be paid by our insurers.  There can be no assurance that thesettlement will be approved in which case, we will continue to defend ourselvesagainst these claims vigorously.  

________________________________________________________________________________________________

| **28.  Selected Quarterly Financial  Data (Unaudited)**                              |                |
|-------------------------------------------------------------------------------------------|----------------|
| The following table presents  unaudited financial data for each quarter of 2005 and 2004: |                |
|                                                                                           | Note (a)       | * * |  | * * | Note (b) | * * |  | * * |
|                                                                                           |                | 12/31/05 | 9/30/05 | 6/30/05 | 3/31/05 | 12/31/04 | 9/30/04 | 6/30/04 | 3/31/04 |
| Total  net sales                                                                     | 13,854    | 13,165  | 13,359  | 15,043  | 17,316  | 16,100  | 15,903  | 15,460  |
| Cost  of sales                                                                            | 8,482     | 6,067  | 6,886  | 7,907  | 9,317  | 8,333  | 7,409  | 7,693  |
| Gross  profit                                                                             | 5,372     | 7,098  | 6,473  | 7,136  | 7,999  | 7,767  | 8,494  | 7,767  |
| Operating  expenses                                                                       | 9,306     | 7,354  | 6,598  | 6,831  | 7,143  | 7,032  | 7,601  | 7,849  |
| Income  (loss) from operations                                                            | (3,934)        | (256) | (125) | 305  | 856  | 735  | 893  | (82) |
| Net  income (loss)                                                                        | (5,240)        | 160  | 811  | (19) | 246  | (145) | 156  | (25) |
|                                                                                           |                |  |  |  |  |  |  |  |
| Net income (loss) allocable  to common shareholders                                       | $ (5,240) | $160  | $ 811  | $ (19) | $ 246  | $(145) | $ 156  | $ (25) |
| Net income (loss) per:                                                                    |                |  |  |  |  |  |  |  |
|       Basic share                                                     | ($0.52)        | $0.02 | $0.08 | ($0.00) | $0.03 | ($0.02) | $0.02 | ($0.00) |
|      Diluted share                                                    | ($0.52)        | $0.02 | $0.08 | ($0.00) | $0.03 | ($0.02) | $0.02 | ($0.00) |
|      Basic  shares                                               | 10,117    | 10,114 | 10,091 | 10,060  | 9,310 | 9,290  | 9,173 | 9,047  |
|      Diluted  shares                                             | 10,117    | 10,143 | 10,107 | 10,060  | 9,396 | 9,290  | 9,352 | 9,047  |
|                                                                                           |                |  |  |  |  |  |  |  |  |

Note (a), 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 operating expenses for the write-down of atemporary laboratory building at our Discovery Research business in Bude,England.

Note (b), Fourth quarter 2004 cost of salesinclude a charge totaling $890 for the write-down of ChemCore RIO capitalizedsoftware asset. 

** **

** **

**Reportof Independent Registered Public Accounting Firm**

Boardof Directors and Stockholders

Tripos,Inc.

St.  Louis, Missouri

     We have audited theaccompanying consolidated balance sheets of Tripos, Inc. as of December 31,2005 and 2004, and the related consolidated statements of operations,shareholders' equity and cash flows for the years then ended.  We have alsoaudited the schedule listed in Item 15(a) 2.  These financial statements andschedules are the responsibility of the Company's management.  Ourresponsibility is to express an opinion on these financial statements andschedules 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 to obtainreasonable assurance about whether the financial statements and schedules arefree of material misstatement. The Company is notrequired to have, nor were we engaged to perform, an audit of its internalcontrol over financial reporting.  Our audit included consideration of internalcontrol over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for thepurpose of expressing an opinion on the effectiveness of the Company's internalcontrol over financial reporting. Accordingly, we express no such opinion.  An audit also includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements andschedules, assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall presentation of the financialstatements and schedules.  We believe that our audits provide a reasonablebasis 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, 2005and 2004, and the results of its operations and its cash flows for the years thenended in conformity with accounting principles generally accepted in the United States of America.  

     Also, in our opinion,the 2005 and 2004 schedules present fairly, in all material respects, theinformation set forth therein.

     

     

/s/ BDO Seidman, LLP

Chicago, Illinois

March02, 2006, except for the first paragraph of Note 22,

                whichis as of April 7, 2006 and the second and fourth

 paragraphs of Note 27, which are as of March 21, 2006

                

**Report of Independent Registered PublicAccounting Firm**

TheBoard of Directors and Shareholders

Tripos,Inc.

     We have audited theaccompanying statement of operations, shareholders' equity and cash flows forthe year ended December 31, 2003.  Our audit also included the financialstatement schedule as of and for the year ended December 31, 2003 listed in theindex at Item 15(a).  These financial statements and schedule are theresponsibility of the Company's management.  Our responsibility is to expressan opinion on these financial statements and schedule based on our audit.  

     We conducted our auditin accordance with auditing standards generally accepted in the United States.  Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  We were not engaged to perform an audit of theCompany's internal control over financial reporting.  Our audit includedconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the Company'sinternal control over financial reporting.  Accordingly we express no suchopinion.  An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management,and evaluating the overall financial statement presentation.  We believe thatour audit provides a reasonable basis for our opinion.

     In our opinion, thefinancial statements and schedule referred to above present fairly, in allmaterial respects, the consolidated financial position of Tripos, Inc. atDecember 31, 2003, and the consolidated results of its operations and its cashflows for the period ending December 31, 2003, in conformity with U.S.generally accepted accounting principles.

ERNST & YOUNG LLP

St.  Louis, Missouri

March29, 2004

** **

**Item9.   Changes in and Disagreements with Accountants on Accountingand 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, ismade known to our Chief Executive Officer and Chief Financial Officer by otherswithin those entities, particularly during the period in which this report isbeing prepared.  Management of the Company, including the Chief ExecutiveOfficer and the Chief Financial Officer, have evaluated the effectiveness ofthe Company's internal controls over financial reporting for the year endDecember 31, 2005 and on March 6, 2006 disclosed the material weakness ininternal controls described below.

```
On February 28, 2006, the Audit Committee of the Board of Directors
concluded that the Company's condensed consolidated financial statements included in its
Quarterly Reports on Form 10−Q for the fiscal quarters ended March 31, 2005, June 30, 2005
and September 30, 2005 should be restated to correct an error relating to the accounting for foreign
exchange gains and losses from certain intercompany transactions and that such previously filed
financial statements should no longer be relied on.  This error found by management in a
consolidating financial-statement spreadsheet application related to foreign currency translation
gains and losses from intercompany transactions that should have been recorded in "Other
income and expense" on the statement of operations instead of "Other comprehensive
income" within the shareholders' equity section of the balance sheet.  The error
occurred in a spreadsheet used solely for 2005 interim reporting.  Previously reported
amounts for 2004 and 2003 were not affected by this error. All other asset and liability accounts in
the balance sheet and operating activity on the statement of operations were properly reported.
```

The Audit Committee discussed the mattersassociated with the restatement with BDO Seidman, LLP, the Company'sindependent registered public accounting firm.

As a result of the error described above, theCompany has determined, and the Audit Committee concurred, that a materialweakness existed with respect to its determination of the completeness andaccuracy and monitoring of foreign exchange transaction gains/losses related tocertain intercompany balances.  This control deficiency resulted in therestatement of the Company's condensed consolidated financial statements forthe fiscal quarters ending March 31, 2005, June 30, 2005 and September 30, 2005as filed on a Form 10−Q/A for each of those fiscal quarters. Accordingly, the Audit Committee has agreed with management's assessment thatits disclosure controls and procedures were not effective and this controldeficiency constituted a material weakness in its internal control overfinancial reporting as of December 31, 2005.  A material weakness is a controldeficiency or combination of control deficiencies that results in more than aremote likelihood that a material misstatement of the annual or interimfinancial statements will not be prevented or detected.

As a result of this determination that thecontrols in place over the process of translating certain intercompany balancesdid not operate effectively as of and during the year ended December 31, 2005,the Company and its independent registered accountants have performedadditional procedures during the fourth quarter of 2005 closing process toaddress the control failure that occurred, including: a) performing additionalrecalculations of foreign exchange transaction gains/losses on the intercompanybalances and ending other comprehensive income balance; b) reconfirmation ofintercompany settlements related to these balances; and c) rectified the errorswithin the consolidating spreadsheet application.  The Audit Committee believesthat these corrective actions, taken as a whole, will successfully mitigate thematerial weakness described above and the Company will continue to performthese enhanced procedures as part of their normal closing process.

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 30,2005 was 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 31,2005 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**

The information required by this item is included underthe captions "Election of Directors" in our Proxy Statement in connectionwith the Annual Meeting of Shareholders to be held on May 17, 2006 and isincorporated herein by reference.  The information required by this itemrelating to Tripos' executive officers and key employees is included in thatsame Proxy Statement under the caption "Management" and isincorporated herein by reference.

Audit Committee Financial Expert

The information required by this item is included underthe caption "Audit Committee" in our Proxy Statement in connectionwith the Annual Meeting of Shareholders to be held on May 17, 2006 and isincorporated herein by reference. 

Code of Ethics

The Company has adopted a code of ethics that applies toall of its directors, officers (including its chief executive officer, chieffinancial officer, chief accounting officer, controllers and any personsperforming similar functions) and employees.  The Company's code of ethics isavailable on its website at www.tripos.com.  The Company will also post anyamendments to or waivers of its code of ethics on its website.

**Item11.   Executive Compensation**

The information required by this item isincluded under the caption "Election of Directors - DirectorRemuneration" and under the caption "Executive Compensation andRelated Information", except for the "Report of the CompensationCommittee" and the "Comparison of Shareholder Return", in theProxy Statement in connection with the Tripos Annual Meeting of Shareholders tobe held on May 17, 2006 and is incorporated herein by reference.

** **

**Item12.   Security Ownership of Certain Beneficial Owners andManagement**

The information required by this item isincluded under the caption "Ownership of Securities" in the ProxyStatement in connection with the Annual Meeting of Shareholders to be held on May17, 2006 and is incorporated herein by reference.

** **

**Item13.   Certain Relationships and Related Transactions**

The information required by this item isincluded under the caption "Related Party Transactions" within theExecutive Compensation and Related Matters section of the Proxy Statement inconnection with the Annual Meeting of Shareholders to be held on May 17, 2006and is incorporated herein by reference.

**Item 14.   Principal AccountantFees and Services**

The information required by this item isincluded under the caption "Audit Fees" and "All OtherFees" in the Proxy Statement in connection with the Annual Meeting ofShareholders to be held on May 17, 2006 and is incorporated herein byreference.

** **

** **

** **

** **

**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

                                23.2****Consentof Ernst & Young 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

      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                                                                      April11, 2006

                          JohnP. McAlister, III                                                                Date

                          President,Chief Executive 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, III,B. James Rubin and John D. Yingling, and each of them (with full power to eachof them to act alone), his true and lawful attorney-in-fact and agent, withfull power of substitution and resubstitution, for him and in his name, placeand stead, in any and all capacities, to sign any or all amendments to thisreport on Form 10-K for the fiscal year ended December 31, 2005, and to filethe same, with all exhibits thereto and other documents in connectiontherewith, with the Securities and Exchange Commission, granting unto saidattorneys-in-fact and agents, and each of them, 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 saidattorneys-in-fact and agents, or any of them, or their substitutes, may lawfullydo or cause to be done 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  11, 2006                                                  |
| John  P. McAlister III                                           | President  and Director                                           |                                                                  |
|                                                                  | (Principal  Executive Officer)                                    |                                                                  |
|                                                                  |                                                                   |                                                                  |
| /s/  B. James Rubin                                              | Senior  Vice President,                                           | April  11, 2006                                                  |
| B.  James Rubin                                                  | Chief  Financial Officer and Secretary                            |                                                                  |
|                                                                  | (Principal  Financial Officer)                                    |                                                                  |
|                                                                  |                                                                   |                                                                  |
| /s/  John D. Yingling                                            | Vice  President,                                                  | April  11, 2006                                                  |
| John  D. Yingling                                                | Chief  Accounting Officer                                         |                                                                  |
|                                                                  | (Principal  Accounting Officer)                                   |                                                                  |
|                                                                  |                                                                   |                                                                  |
| /s/  Ralph S. Lobdell                                            | Chairman  of the Board of Directors                               | April  11, 2006                                                  |
| Ralph  S. Lobdell                                      |                                                                   |                                                                  |
|                                                                  |                                                                   |                                                                  |
| /s/  Stewart Carrell                                             | Director                                                          | April  11, 2006                                                  |
| Stewart  Carrell                                                 |                                                                   |                                                                  |
|                                                                  |                                                                   |                                                                  |
| /s/  Gary Meredith                                               | Director                                                          | April  11, 2006                                                  |
| Gary  Meredith                                                   |                                                                   |                                                                  |
|                                                                  |                                                                   |                                                                  |
| /s/  Ferid Murad                                                 | Director                                                          | April  11, 2006                                                  |
| Ferid  Murad                                                     |                                                                   |                                                                  |
|                                                                  |                                                                   |                                                                  |
| /s/  Alfred Alberts                                              | Director                                                          | April  11, 2006                                                  |
| Alfred  Alberts                                                  |                                                                   |                                                                  |

** **

TRIPOS, INC.

SCHEDULE II-VALUATIONAND QUALIFYING ACCOUNTS

Years Ended December 31, 2003, December31, 2004 and December 31, 2005

(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                                                                                                                                                                              |                                 |                               |        |                            |  |  |
| 2003                                                                                                                                                                                                            | 246                             | 357                      |        | --                         | 213 | 390 |
| 2004                                                                                                                                                                                                            | 390                             | (50)                          |        | --                         | 94 | 246 |
| 2005                                                                                                                                                                                                            | 246                             | (46)                          |        | --                         | 10 | 190 |
|                                                                                                                                                                                                                 |                                 |                               |        |                            |  |  |
| Valuation  Allowance for

 Deferred Income Tax  Assets                                                                                                                                                     |                                 |                               |        |                            |  |  |
| 2003                                                                                                                                                                                                            | 4,792                           | 817                           |        | --                         | -- | 5,609 |
| 2004                                                                                                                                                                                                            | 5,609                           | 1,666                         |        | --                         | -- | 7,275 |
| 2005                                                                                                                                                                                                            | 7,275                           | 2,023                         |        | --                         | -- | 9,298 |
|                                                                                                                                                                                                                 |                                 |                               |        |                            |  |  |
| Inventory  Reserve for 

                              Obsolescence |                                 |                               |        |                            |  |  |
| 2003                                                                                                                                                                                                            | 1,602                           | 918                           |        | --                         | -- | 2,520 |
| 2004                                                                                                                                                                                                            | 2,520                           | 1,006                         |        | --                         | --  | 3,526 |
| 2005                                                                                                                                                                                                            | 3,526                           | (362)                         |        | --                         | --  | 3,164 |

                                                                **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 l     Form ofExecutive Severance Agreement*

10.11 l     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     Loan Agreement between Tripos, Inc. and LaSalleNational Bank dated April 30, 1999

10.14 k    ThirdAmendment to the Amended and Restated Loan Agreement with LaSalle Bank N.A.dated December 20, 2004.

10.15 l     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

21.1         Subsidiariesof Tripos, Inc.

23.1         Consent of BDOSeidman, LLP, Independent Auditors

23.2            Consentof Ernst & Young 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

31.2             Certificationby Chief Financial 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 endedDecember 31, 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.

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).

**Exhibit Index(continued)**

Exhibit

Number                                                  Description

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               Previously filed as an exhibit to the Company's Form10-Q for the period ended June 30, 1999 and incorporated herein by reference (SEC File No. 0-23666).

k              Previouslyfiled as an exhibit to the Company's Form 10-K for the fiscal year endedDecember 31, 2004 (SEC File No. 0-23666) and incorporated herein by reference.

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

** **