######  

######  

###### FORM 10-Q/A

(Amendment No. 1)

** **

**UNITED STATES**

###### SECURITIES AND EXCHANGE COMMISSION

**Washington, DC  20549**

** **

(Mark One)

[X]**  QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**

**SECURITIES EXCHANGE ACTOF 1934**

or

[  ]  **TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**

**SECURITIES EXCHANGE ACTOF 1934**

###### For the quarterly period ended September 30,2005

** **

###### Commission File Number 0-23666

**TRIPOS, INC.**

(Exact Name ofRegistrant as Specified in its Charter)

** **

| **Utah**                         | ** ** | **43-1454986**      |
|----------------------------------|------------|---------------------|
| (State or Other  Jurisdiction of | ** ** | (I.R.S. Employer    |
| Incorporation or  Organization)  | ** ** | Identification No.) |

** **

**1699 South Hanley Road**

**St. Louis, Missouri63144**

(Address of PrincipalExecutive Offices and Zip Code)

** **

**(314) 647-1099**

(Registrant's TelephoneNumber, Including Area Code)

** **

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) of 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 requirement for the past 90 days.

Yes    X            No       

Indicate by check mark whether the registrant isan accelerated filer (as defined in Rule 12b-2 of the Exchange Act)

Yes    X            No       

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act)

Yes        _        No  X              

Number of shares outstanding of the issuer'sCommon Stock, par value $.01 per share, as of November 7, 2005:****10,115,871shares.

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Tripos, Inc.

Explanatory Note

For Quarter Ended

September 30, 2005

This amendment to theCompany's Quarterly Report on Form 10-Q for the quarter ended September 30,2005 is being filed to revise the consolidated financial statements, as setforth in Note 14 of the Notes to Unaudited Consolidated Financial Statements,from those previously filed with the Securities and Exchange Commission (the"SEC") on November 9, 2005.  The Company has filed this amendment in order tocorrect an error found in a consolidating spreadsheet application used solelyfor 2005 interim reporting relating to accounting for foreign exchangetransaction gains/losses on certain intercompany balances as described in Note14.  Previously reported amounts for 2004 were not affected by this error.  Exceptfor changes in amounts reported in Items 1 and 2 of this Quarterly Report onForm 10-Q to correct this error, the addition of a new Note 14 of the Notes tothe Company's Consolidated Financial Statements, revised disclosures regardinginternal controls in Item 4, and new certifications filed as exhibits to thisQuarterly Report on Form10-Q, this amendment does not affect any amounts ordisclosures previously reported or disclosed in the Quarterly Report on Form10-Q for the quarter ended September 30, 2005, nor does it reflect eventsoccurring after the date of filing of the Quarterly Report on Form 10-Q.

In accordance withapplicable SEC rules, the Quarterly Report on Form 10-Q/A includes updatedcertifications from the Company's Chief Executive Officer and Chief FinancialOfficer as Exhibits 31.1, 31.2 and 32.

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**TRIPOS,INC.**

###### TABLE OF CONTENTS

|                                                                                                                                                                                                       | **Page** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------|
| **PART  I  FINANCIAL INFORMATION**                                                                                                                                                               |          |
| **Item  1.  Financial Statements**                                                                                                                                                               |          |
|   Consolidated  Balance Sheets at September 30, 2005 (Unaudited) and December 31, 2004                                                                                                      | 4        |
|   Consolidated  Statements of Operations for the Three- and Nine-Months Ended 

      September  30, 2005 (Unaudited) and September 30, 2004 (Unaudited) | 5        |
|   Consolidated  Statements of Cash Flows for the Nine-Months Ended 

      September  30, 2005 (Unaudited) and September 30, 2004 (Unaudited)                 | 6-7      |
|   Notes  to Consolidated Financial Statements (Unaudited)                                                                                                                                   | 7-24     |
|                                                                                                                                                                                                       |          |
| **Item  2. Management's Discussion and Analysis of Financial Condition**

**      and  Results of Operations**                                                          | 25-33    |
| **Item  3. Quantitative and Qualitative Disclosures about Market Risk**                                                                                                                               | 34       |
| **Item  4. Controls and Procedures (as amended)**                                                                                                                                                     | 34-35    |
|                                                                                                                                                                                                       |          |
| **PART  II  OTHER INFORMATION**                                                                                                                                                                  | 36       |
| **SIGNATURES**                                                                                                                                                                                        | 37       |

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**PART I**

##### FINANCIALINFORMATION

** **

**Item1.  Financial Statements.**

**TRIPOS, INC.**

**CONSOLIDATED BALANCESHEETS**

(In thousands)

|                                                                                                                                                                                                                                                               | Restated 

**09-30-2005** |  

 12-31-2004 |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------|--------------------------|
| ASSETS                                                                                                                                                                                                                                                        | **(Unaudited) **          |                          |
| Current  assets:                                                                                                                                                                                                                                              |                                |                          |
|      Cash  and cash equivalents                                                                                                                                                                                                      | **$ 3,566 **         | $ 4,171        |
|      Marketable  securities                                                                                                                                                                                                          | **-- **                   | 341                 |
|      Accounts  receivable, less allowances for doubtful accounts of       **$238** and $246, respectively                                                                                                   | **9,301 **                | 15,666              |
|      Inventory                                                                                                                                                                                                                       | **8,080 **                | 12,007              |
|      Deferred  income taxes                                                                                                                                                                                                          | **-- **                   | 29                  |
|      Prepaid  expenses                                                                                                                                                                                                               | **5,183 **                | 5,603               |
| Total current assets                                                                                                                                                                                                                                          | **26,130 **               | 37,817              |
|                                                                                                                                                                                                                                                               | ** **                     |                          |
|    Property  and equipment, less accumulated depreciation                                                                                                                                                                                      | **28,354 **               | 30,672              |
|    Capitalized  development costs, less accumulated amortization                                                                                                                                                                               | **3,541 **                | 2,159               |
|    Goodwill                                                                                                                                                                                                                                    | **5,273 **                | 965                 |
|    Intangible  assets, less accumulated amortization                                                                                                                                                                                           | **3,675 **                | 90                  |
|    Investments  recorded at cost                                                                                                                                                                                                               | **1,710 **                | 1,397               |
|    Other  assets, net                                                                                                                                                                                                                          | **--  **             | 22                  |
| Total assets                                                                                                                                                                                                                                                  | **$ 68,683 **        | $ 73,122       |
|                                                                                                                                                                                                                                                               | ** **                     |                          |
| LIABILITIES  AND SHAREHOLDERS' EQUITY                                                                                                                                                                                                                         |
| Current  liabilities:                                                                                                                                                                                                                                         | ** **                     |                          |
|      Current  portion of long-term debt                                                                                                                                                                                              | **$ 2,321 **         | $ 4,514        |
|      Current  portion of capital leases                                                                                                                                                                                              | **3,207 **                | 3,689               |
|      Accounts  payable                                                                                                                                                                                                               | **1,114 **                | 1,796               |
|      Accrued  expenses                                                                                                                                                                                                               | **3,283 **                | 8,950               |
|      Deferred  revenue                                                                                                                                                                                                               | **15,677 **               | 21,945              |
|      Deferred  income taxes                                                                                                                                                                                                          | **281 **                  | --                  |
| Total current liabilities                                                                                                                                                                                                                                     | **25,883 **               | 40,894              |
|                                                                                                                                                                                                                                                               | ** **                     |                          |
|    Capital  leases, less current portion                                                                                                                                                                                                       | **2,017 **                | 2,653               |
|    Long-term  debt, less current portion                                                                                                                                                                                                       | **6,595 **                | --                  |
|    Deferred  income taxes                                                                                                                                                                                                                      | **-- **                   | 1,709               |
| Shareholders'  equity :                                                                                                                                                                                                                                       | ** **                     |                          |
|      Common  stock, $0.01 par value; authorized 20,000 shares,       issued and outstanding 10,116 shares as of  September 30, 2005 and 9,359       shares as of December 31, 2004 | **101 **                  | 94                  |
|      Additional  paid-in capital                                                                                                                                                                                                     | **41,332 **               | 37,394              |
|      Retained  earnings (deficit)                                                                                                                                                                                                    | **(7,137)**                    | (8,089)                  |
|      Other  comprehensive loss                                                                                                                                                                                                       | **(108)**                      | (1,533)                  |
| Total shareholders' equity                                                                                                                                                                                                                                    | **34,188 **               | 27,866              |
|                                                                                                                                                                                                                                                               | ** **                     |                          |
| Total liabilities and shareholders' equity                                                                                                                                                                                                                    | **$ 68,683 **        | $ 73,122       |

*Seeaccompanying notes.*

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**Item1.  Financial Statements (continued)**

**TRIPOS, INC.**

**CONSOLIDATED STATEMENTSOF OPERATIONS**

**(In thousands, exceptper share data)**

**(Unaudited)**

|                                                                 | **Three Months Ended**   |               | **Nine Months Ended** |
|-----------------------------------------------------------------|--------------------------|--------------------|-----------------------|
|                                                                 | Restated

**09-30-2005** |  

09-30-2004 |                  | Restated

**09-30-2005** |  

09-30-2004 |
| Net  sales:                                                     | ** **               | ** **         | ** **            | ** ** |  |
|    Discovery  informatics products & support | **$ 6,618 **   | $ 6,005  | ** **            | **$ 18,730 ** | $ 18,225  |
|    Discovery  informatics services               | **716 **            | 1,247         | ** **            | **1,964 ** | 2,681  |
|    Discovery  research products & services   | **5,821 **          | 8,824         | ** **            | **20,842 ** | 26,459  |
|    Hardware                                      | **10 **             | 24            | ** **            | **31 ** | 98  |
| Total net sales                                                 | **13,165 **         | 16,100        | ** **            | **41,567 ** | 47,463  |
|                                                                 | ** **               |                    | ** **            | ** ** |  |
| Cost  of sales                                                  | **6,067 **          | 8,333         | ** **            | **20,860 ** | 23,435  |
| Gross profit                                                    | **7,098 **          | 7,767         | ** **            | **20,707 ** | 24,028  |
|                                                                 | ** **               |                    | ** **            | ** ** |  |
| Operating  expenses:                                            | ** **               |                    | ** **            | ** ** |  |
|    Sales  and marketing                          | **2,556 **          | 3,089         | ** **            | **8,186 ** | 9,464  |
|    Research  and development                     | **2,898 **          | 2,140         | ** **            | **6,810 ** | 7,433  |
|    General  and administrative                   | **1,900 **          | 1,803         | ** **            | **5,787 ** | 5,585  |
| Total operating expenses                                        | **7,354 **          | 7,032         | ** **            | **20,783 ** | 22,482  |
|                                                                 | ** **               |                    | ** **            | ** ** |  |
| Income (loss) from operations                                   | **(256)**                | 735           | ** **            | **(76)** | 1,546  |
|                                                                 | ** **               |                    | ** **            | ** ** |  |
| Interest  expense                                               | **(478)**                | (301)              | ** **            | **(1,259)** | (820) |
| Other  income (loss), net                                       | **311 **            | (67)               | ** **            | **(346)** | (5) |
| Income (loss) before income taxes                               | **(423)**                | 367           | ** **            | **(1,681)** | 721  |
|                                                                 | ** **               |                    | ** **            | ** ** |  |
| Income  tax expense (benefit)                                   | **(583)**                | 512           | ** **            | **(2,633)** | 735  |
| Net income (loss)                                               | **$ 160 **     | $ (145)       | ** **            | **$ 952 ** | $ (14) |
|                                                                 | ** **               |                    | ** **            | ** ** |  |
| Basic  income (loss) per share                                  | **$ 0.02 **    | $ (0.02)      | ** **            | **$ 0.09 ** | $ (0.00) |
| Basic  weighted average number of shares                        | **10,114 **         | 9,290         | ** **            | **10,088 ** | 9,170  |
| Diluted  income (loss) per share                                | **$ 0.02 **    | $ (0.02)      | ** **            | **$ 0.09 ** | $ (0.00) |
| Diluted  weighted average number of shares                      | **10,143 **         | 9,290         | ** **            | ** 10,132 ** | 9,170  |

*See accompanying notes.*

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**Item 1.  Financial Statements (continued)**

**TRIPOS, INC.**

**CONSOLIDATED STATEMENTSOF CASH FLOWS**

**(In Thousands)**

**(Unaudited)**

|                                                                                      | **Nine Months Ended**    |
|--------------------------------------------------------------------------------------|--------------------------|
|                                                                                      | Restated

**09-30-2005** |  

09-30-2004 |
| **Operating  activities:**                                                           | ** **               |  |
| Net  income                                                                          | **$952 **           | $ (14) |
| Adjustments  to reconcile net income to   net cash provided by operating activities: | ** **               |  |
|    Depreciation  of property and equipment                            | **3,121 **          | 3,204  |
|    Amortization  of capitalized development costs & intangibles   | ** 513 **      | 208  |
|    Amortization  of debt discount                                     | ** 42 **       | --  |
|    Appreciation  (depreciation) in foreign currency hedge instruments | **-- **             | 876  |
|    Gain  from sale of marketable securities                           | **(240)**                | (144) |
|    Gain  from sale of property and equipment                          | **-- **             | (29) |
|    Impairment  loss on long-term investment                           | ** 88 **       | 50  |
|                                                                                      | ** **               |  |
| Change  in operating assets and liabilities (excluding acquired business):           | ** **               |  |
|    Accounts  receivable                                               | ** 559 **      | 6,392  |
|    Inventories                                                        | ** 2,993 **    | 1,140  |
|    Prepaid  expenses and other current assets                         | **(690)**                | 2,039  |
|    Accounts  payable and accrued expenses                             | **(3,641)**              | (4,523) |
|    Deferred  tax benefit                                              | **(1,288)**              | (38) |
|    Deferred  revenue                                                  | **318 **            | 1,887  |
| Net cash provided by operating activities                                            | **2,727 **          | 11,048  |
|                                                                                      | ** **               |  |
| **Investing  activities:**                                                           | ** **               |  |
| Purchases  of property and equipment                                                 | **(880)**                | (4,524) |
| Capitalized  development costs                                                       | **(1,470)**              | (9) |
| Acquisition  of business, net of cash received                                       | **(4,770)**              | --  |
| Proceeds  from the sale of marketable securities                                     | **426 **            | 196  |
| Proceeds  from the sale of property and equipment                                    | **-- **             | 169  |
| Investment  in unconsolidated affiliates                                             | **(133)**                | (178) |
| Net cash used in investing activities                                                | **(6,827)**              | (4,346) |
|                                                                                      | ** **               |  |
| **Financing  activities:**                                                           | ** **               |  |
| Proceeds  from stock issuance pursuant to stock purchase and option plans            | **539 **            | 640  |
| Net  borrowings (repayments) under revolving line of credit                          | **1,300 **          | (8,200) |
| Proceeds  from issuance of long-term debt and capital leases                         | **5,554 **          | 4,363  |
| Payments  on long-term debt and capital lease obligations                            | **(4,109)**              | (2,213) |
| Net cash provided by (used in) financing activities                                  | **3,284 **          | (5,410) |
|                                                                                      | ** **               |  |
| Effect  of foreign exchange rate changes on cash and cash equivalents                | **211 **            | 531  |
|                                                                                      | ** **               |  |
| Net increase (decrease)  in cash and cash equivalents                           | **(605)**                | 1,823  |
|                                                                                      | ** **               |  |
| Cash  and cash equivalents at beginning of period                                    | **4,171 **          | 2,945  |
| Cash and cash equivalents at end of period                                           | **$ 3,566 **   | $ 4,768  |
|                                                             | ** **               |  |

*See accompanying notes.*

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**Item 1.  Financial Statements (continued)**

** **

**Supplemental Disclosure of Cash Flow Information**

Information aboutnoncash investing activities not reflected in the Consolidated Statement ofCash Flows follows:

| (Amounts in thousands)                                                                                  | **Nine Months Ended** |
|---------------------------------------------------------------------------------------------------------|-----------------------|
| ** **                                                                                              | **09-30-2005**        | 09-30-2004 |
| **Noncash investing activities**                                                                        | ** **            |  |
|   Increase (decrease) in fair value  of marketable securities,    net of tax effect | **$ 53 **   | $ --  |

In January 2005, theCompany acquired Optive Research, Inc. for $4,770 in cash, 600 shares of theCompany's common stock valued at $3,183 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    | (3,183)            |
|                                               |                    |
|   Cash paid                         | $ 5,417  |

**TRIPOS, INC.**

**NOTES TO UNAUDITEDCONSOLIDATED FINANCIAL STATEMENTS**

 **(In thousands,except per share data)**

**(1)     Summary ofSignificant Accounting Policies**

**Organization**

Our discoveryinformatics and discovery research products and services enable life science companiesto enhance their drug discovery capabilities.  We combine our resources incomputer-aided molecular design, cheminformatics, chemistry research andproduction, with scientists on our staff to address the challenges facingpharmaceutical research organizations. These pharmaceutical firms deliverproducts and services that are internationally recognized for their innovationand quality.  By formulating new chemical compounds and aiding our partners'design of new chemical compounds in ways that we believe are more likely toresult in drug discoveries, we offer our customers advantages in terms ofresearch cycle time, cost, and efficiency of research activities.

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**Item1.  Financial Statements (continued)**

We have formedcommercial relationships with most major pharmaceutical companies and with manyemerging biotechnology companies based on their use of some or all of ourproducts and services.  In addition, we have established strategiccollaborations with several of the companies based on our specific uniquecapabilities.  Representative pharmaceutical and biotechnology clients include:Sanofi-Aventis, Bayer, Bristol-Myers Squibb, Pfizer, Schering AG, Servier,CeNeS, BioTie and Chronogen.  

Tripos was formed in1979 to commercialize software for molecular visualization, analysis anddesign.  In building our discovery informatics services, we have focused ondeveloping an integrated suite of offerings to stay at the leading edge ofscientific research.  In addition to creating discovery informatics product andservice offerings, our chemistry research activities have created anopportunity for us to participate in therapeutic collaborations with certain ofour customers, giving us the potential for milestones and/or to a lesserextent, royalty interests in early-stage new drug candidates.

Our business model isbased primarily on deriving recurring revenues from our discovery informaticsand discovery research businesses and to a lesser extent on achievingcontributions from therapeutic collaborations if and when new therapeutics aredeveloped.  The following is a description of each area of our business:

•        *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.  We recently introduced Windows®-basedprograms such as Benchware® 3D Explorer (formerly known as Lithium®), Benchware®Dock, Benchware® Notebook, and Benchware®HTS Data Miner, along with other desktop systems to reachbeyond the traditional computational chemistry user base within life scienceresearch organizations.  The Benchware® suite of productsfacilitates visualization and communication of computational models to otherparts of the organization including combinatorial library enumeration anddesign to be performed by bench scientists while HTS Data Miner provides anintuitive means of high-throughput screening (HTS) data analysis.

           Additionalnew Tripos products and technologies will enable management of modern researchlaboratory operations as well as data analysis: the Benchware®Notebook provides researchers with a common interface to enter all experimentaldata and store such knowledge and experience for future query and retrieval;ChemCoreRIOTM is a chemical registration, inventory and orderingsystem; ModelBaseTM is an Oracle® based system forstorage and retrieval of computational and therapeutic product knowledge; andthe Auspyx® datacartridge is a supporting technology for storing and searching chemical datawithin Oracle relational databases.  These products and technologies areprovided to clients through a license arrangement and typically involve someservices to facilitate 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.

             

•         *Discovery  Research Products and Services.*Tripos Discovery Research Centre'slaboratories, based in the United Kingdom, offer compound analysis, design andsynthesis along with a 

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**Item 1.  FinancialStatements (continued)**

           complete suite of lead discovery and optimization projects on a fee per service basis.  Certainprojects are focused on specific therapeutic targets that result in ourobtaining an ownership or economic interest in the products resulting from ourresearch.  Typically such ownership positions result only when we invest bycontributing discounted services, "in-kind" products or services, orspecific and unique scientific expertise to a project.  We enter suchcollaborations on an opportunistic basis if and when scientific and fundingresources are available.  Our intent is to pursue improved returns from theseprojects.  In addition, we are currently advancing certain Lead Discoverycompounds through additional rounds of screening to create higher valueofferings.

We have a geographicallydiverse customer base, with over half of our revenues derived from customersoutside of North America.  Our worldwide sales force operates from offices inthe United States, Canada, England, France, and Germany, and throughrepresentatives around the Pacific Rim.  Our headquarters is in St. Louis,Missouri and our chemistry laboratory is in Cornwall, England.

** **

**Basis of Presentation**

The accompanyingunaudited consolidated financial statements have been prepared in accordancewith generally accepted accounting principles for interim financial informationand with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes requiredby accounting principles generally accepted in the United States for completefinancial statements.  In the opinion of management, all normal recurringadjustments necessary for a fair presentation of such financial statements havebeen included.  For a further description of accounting policies, please referto the "Critical Accounting Policies" section in the Company's annualreport on Form 10-K for the year ended December 31, 2004.  Operating resultsfor the nine-month period ended September 30, 2005 are not necessarilyindicative of the results that may be expected for the year ending December 31,2005.

** **

**Revenue Recognition **

** **

**Discovery InformaticsProducts**

** **

We recognize revenues inaccordance with the American Institute of Certified Public Accountants (AICPA)Statement of Position (SOP) 97-2, "Software Revenue Recognition", asamended.  Revenues from informatics software license agreements are recognizedwhen each of the following criteria are met as set forth in paragraph 8 of SOP97-2: (1) persuasive evidence of an arrangement exists, (2) delivery hasoccurred, (3) the fee is fixed or determinable, and (4) collectibility isprobable.

Our largest sources ofsoftware license revenue are from Term and Bundled licenses that are time-basedarrangements for one or multiple software products that are sold together withmaintenance and support for the term of the license arrangement.  We do nothave Vendor Specific Objective Evidence ("VSOE") to determine fairvalue of the maintenance and support in term arrangements and thereforerecognize revenues from these bundled time-based licenses ratably over thelicense term, which typically range from 1 to 3 years. 

 

We  allocate revenues from Perpetual software arrangements involving multiple  elements to each element based on the relative fair values as determined by  the VSOE for each element.  We limit our assessment of VSOE for eachelement to the price charged when the same element is sold separately.  Wehave analyzed all of the elements included in our multiple-element arrangementsand determined that

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**Item 1.  FinancialStatements (continued)**

we have sufficient VSOEto allocate revenues to maintenance and support services, and training.  Wesell training separately and have established VSOE on this basis.  VSOE formaintenance and support is determined based upon the renewal rates in contractsthemselves, which is based on a fixed percentage of the current perpetuallicense list price.  Accordingly, assuming all other revenue recognitioncriteria are met, revenues from perpetual licenses are recognized upon deliveryof the software using the residual method in accordance with SOP 98-9,"Modification of SOP 97-2, Software Revenue Recognition, with Respect toCertain Transactions."

Software maintenanceagreements provide technical support and the right to unspecified enhancementsand upgrades on a "when-and-if-available" basis.  Post-contractsupport revenues on perpetual agreements are recognized ratably over the termof the support period (generally one-year), while training and other servicerevenues are recognized as the related services are provided.  Any unrecognizedportion of amounts paid or billed in advance for licenses and services isrecorded as deferred revenue.

**Discovery InformaticsServices**

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

In applying theprovisions of SOP 81-1 the percentage of completion method is utilized.  Forcontracts where customer approval of contractually required tasks must occur ateach distinct 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, which approximates progresstowards completion.  When current estimates of total contract revenue andcontract cost indicate a loss, a provision for the entire loss on the contractis made in the period that the loss becomes evident.

** **

DIS also includes softwaredevelopment ("SD") projects that are contractual arrangements withcustomers for use of our software developers in an effort to develop ascientific software tool for use in drug discovery.  Billings may be on a timeand materials basis; accordingly, we record the related revenue when the timeand costs are incurred at the stated contractual rates.  Other contracts may beaccounted for under milestone or completed contract basis depending on thenegotiated terms.  For these arrangements, cost and revenues are deferred untilachievement of the milestone or completion of the contract. 

**Discovery ResearchProducts and Services**

Discovery research sales include: (1) sales of chemicalcompounds from inventory, (2) long-term contracts to design and producechemical compounds to customer specifications, or (3) contracts to performdiscovery research activities. 

We recognize revenue from the sale of chemical compoundsupon shipment of the products, FOB shipping point, to the customer.  Thispractice is consistent with the four criteria required for revenue recognition

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**Item 1.  Financial Statements (continued)**

listed in paragraph 1 of Staff Accounting Bulletin("SAB") 101 issued by the U.S. Securities and Exchange Commission("SEC").  For chemical compound transactions, persuasive evidence ofan agreement exists upon the receipt of a contract outlining the purchase andusage terms of the compounds.  A purchase order may also be received asconfirmation.  As stated above, revenue is not recognized until the compoundshave been shipped to the customer.  The selling price for compounds is fixedaccording to the terms of the contract or customer's purchase order.  Paymentterms for chemical compound transactions are Net 30 days.  We have experiencedvery few bad debts arising from these product transactions; as a result,collectibility is reasonably assured.

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

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

** **

** **

**Hardware Sales**

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

** **

** **

** **

**Stock-based Compensation**

We account for stockoption plans under the intrinsic value method as permitted under AccountingPrinciples Board Opinion No. 25 ("APB 25"), "*Accounting forStock Issued to Employees*", and related Interpretations.  Under APB25, generally no compensation expense is recognized because the exercise priceof the options equals the fair value of the stock at the grant date.

The following tableillustrates the effect on net income and earnings per share for the three- andnine-months ended September 30, 2005 and 2004 as if the Company had applied thefair value recognition provisions of SFAS 148, "*Accounting forStock-Based Compensation--Transition and Disclosure*", to stock-basedemployee compensation. 

| 11 |
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**Item 1.  Financial Statements (continued)**

|                                                                                                                                                                                                            | **Three-month Period**   |               | **Nine-month Period** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------|--------------------|-----------------------|
|                                                                                                                                                                                                            | Restated

**09-30-2005** |  

09-30-2004 |                  | Restated

**09-30-2005** |  

09-30-2004 |
| Net  income as reported                                                                                                                                                                                    | **$ 160 **     | $ (145)       | ** **            | **$ 952** | $ (14) |
| Deduct:  Total stock-based employee     compensation expense determined     under fair value based method for all     awards, net of related tax effects | **242 **            | 343           | ** **            | **545** | 1,001  |
| Pro forma net income (loss)                                                                                                                                                                                | **$ (82)**          | $ (488)       | ** **            | **$ 407** | $ (1,015) |
|                                                                                                                                                                                                            | ** **               | ** **         | ** **            | ** ** |  |
| Pro  forma income (loss) per share:                                                                                                                                                                        | ** **               | ** **         | ** **            | ** ** |  |
|       Basic-  as reported                                                                                                                                                    | **$ 0.02 **    | $ (0.02)      | ** **            | **$0.09** | $ (0.00) |
|       Basic-  pro forma                                                                                                                                                      | **$ (0.01)**        | $ (0.05)      | ** **            | **$0.04** | $ (0.11) |
|       Diluted-  as reported                                                                                                                                                  | **$ 0.02 **    | $ (0.02)      | ** **            | **$0.09** | $ (0.00) |
|       Diluted-  pro forma                                                                                                                                                    | **$ (0.01)**        | $ (0.05)      | ** **            | **$0.04** | $ (0.11) |

**Income Taxes**

** **

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

The effective tax ratefor 2005 reflects management's current estimate of the distribution of earningsamong the statutory jurisdictions in which we operate, the realization ofR&D tax credits in the U.K. from prior years and the valuation of netoperating losses in the U.S. and U.K. from prior tax years (each endingDecember 31).  We were not able to reflect certain R&D credits in priorperiods until such time as they became more likely than not to be approved bythe tax authorities (predominantly in the U.K.).  During the first quarter of2005, we received notice that tax credits from 2002 had been approved. Calculation of the 2003 and 2004 R&D credits were performed during thesecond quarter of 2005 and a tax benefit of over $2,100 was reflected in thecumulative tax position.  An additional tax benefit of approximately $715 wasclaimed on the 2003 and 2004 tax returns from the follow-on effect of theR&D credits on the U.K. consolidated group.  This additional benefit wasrecorded in the third quarter 2005 tax provision.

The existence ofvaluation allowances established for deferred tax assets related to netoperating losses do not impair our ability to use those deferred tax assetsupon achieving profitability in the related jurisdictions.  Upon therecognition of income in future periods in the jurisdictions where the deferredtax assets were created, release of the corresponding valuation allowances mayresult in a lower effective tax rate. 

| 12 |
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**Item 1.  FinancialStatements (continued)**

** **

**(2)     ContingentLiabilities**

On or about July 24,2003, the Company and two of its executive officers, Dr. John P. McAlister andMr. B. James Rubin, were sued in federal district court in St. Louis, Missourion behalf of purchasers of the Company's common stock during the first half of2002.  The consolidated class action complaint alleged that statements made bythe Company in press releases and other public disclosures contained materiallyfalse and misleading information in violation of the federal securities laws. On or about May 5, 2004, plaintiffs filed a second amended complaint on behalfof a purported class of purchasers of the Company's common stock betweenFebruary 9, 2000 and July 1, 2002 (the "Class Period").  The secondamended complaint generally alleges that, during the Class Period, defendantsmade false or misleading statements of material fact about the Company'sprospects and failed to follow generally accepted accounting principles inviolation of the federal securities laws.  The second amended complaint alsonames Ernst & Young LLP, the Company's former independent registered publicaccounting firm, as a co-defendant.  In August 2004, the Company and theindividual defendants and Ernst & Young filed motions to dismiss the secondamended complaint.  On September 30, 2005, the Company was informed that itsmotion to dismiss was denied, however, the motion to dismiss filed by Ernst& Young was granted.  The amount of damages being sought is unspecified atthis time.  Although the Company believes that it has meritorious defenses tothe claims alleged against it in this action, it is too early in the litigationto provide an accurate assessment of the likelihood or the extent of anyliability arising from this matter.

** **

**(3)     ComprehensiveIncome (Loss)**

The components ofcomprehensive income, net of related tax, for the three- and nine-month periodsended September 30, 2005 and 2004 were as follows:

|                                                                                   | **Three-month Period**   |               | **Nine-month Period** |
|-----------------------------------------------------------------------------------|--------------------------|--------------------|-----------------------|
|                                                                                   | Restated

**09-30-2005** |  

09-30-2004 |                  | Restated

**09-30-2005** |  

09-30-2004 |
| Net income (loss)                                                                 | **$ 160**           | $ (145)       |                       | **$ 952 ** | $ (14) |
| Unrealized gain (loss)on marketable securities                                    | **-- **             | --            |                       | **53 ** | --  |
| Less: reclassification for (gain) loss  included in     net income | **-- **             | --            |                       | **(149)** | (53) |
| Foreign currency translation adjustments                                          | **207 **            | 109           |                       | **1,522 ** | 696  |
| Comprehensive income                                                              | **$ 367 **     | $ (36)        |                       | **$ 2,378 ** | $ 629  |

The components ofaccumulated other comprehensive income, net of related tax, at September 30,2005 and December 31, 2004 were as follows:

|                                          | Restated 

**09-30-2005** |  

12-31-2004 |
|------------------------------------------|--------------------------------|--------------------|
| Foreign currency translation adjustments | **$ (108)**               | $ (1,629)     |
| Unrealized gain on marketable securities | **-- **                   | 96            |
| Accumulated other comprehensive  loss    | **$ (108)**               | $ (1,533)     |

** **

| 13 |
|----|

                                                                                                                                                

----

**Item 1.  FinancialStatements (continued)**

** **

**(4)     Earnings PerShare**  

The following table setsforth the computation of basic and diluted earnings per share for the three-and nine-month periods ended September 30, 2005 and 2004.

|                                                                                                   | **Three-months Ended**   |               | **Nine-months Ended** |
|---------------------------------------------------------------------------------------------------|--------------------------|--------------------|-----------------------|
|                                                                                                   | Restated

**09-30-2005** |  

09-30-2004 |                  | Restated

**09-30-2005** |  

09-30-2004 |
| **Numerator:**                                                                                    | ** **               |                    |                       | ** ** |  |
| Numerator for basic earnings per share--     Net income (loss)                | **$ 160 **     | $ (145)       |                       | **$ 952** | $ (14) |
| **Denominator:**                                                                                  | ** **               |                    |                       | ** ** |  |
| Denominator for basic earnings per share--     Weighted average shares             | **10,114 **         | 9,290         |                       | **10,088** | 9,170  |
| Effect of dilutive securities:                                                                    | ** **               | ** **         | ** **            | ** ** | ** ** |
|    Warrants    Note A                                               | **-- **             | --            |                       | **--** | --  |
|    Employee stock options     Note B                                | **29 **             | --            |                       | **44** | --  |
| Denominator for diluted earnings  per share--     Adjusted weighted average shares | **10,143 **         |  9,290   |                       | **10,132** | 9,170  |
| ** **                                                                                        | ** **               |                    |                       | ** ** |  |
| **Basic** earnings (loss) per share                                                               | **$ 0.02 **    | $ (0.02)      |                       | **$ 0.09** | $ (0.00) |
| **Diluted** earnings (loss) per  share                                                            | **$ 0.02 **    | $ (0.02)      |                       | **$ 0.09** | $ (0.00) |

Note A: For the threeand nine-months periods in 2005, the dilutive effect of the 156 outstandingwarrants has been excluded as the average market price of Tripos common stockwas below the price of the warrants and therefore the warrants could not bedeemed to have been converted into common stock.

Note B: For thethree-month period in 2004 along with the nine-month period in 2004, weightedaverage shares outstanding did not include the effect of employee stockoptions, 58 and 174, respectively, as their inclusion would have beenanti-dilutive.

For additionaldisclosures regarding earnings per share, see the notes to the Company's 2004consolidated financial statements in its Form 10-K.

** **

** **

**(5)     SignificantCustomers **

During the third quarterof 2005 and nine months ended September 2005, revenues from Pfizer, Inc.represented 43% and 46%, respectively, of total net sales.  For the sameperiods in 2004, Pfizer represented 53% and 54%, respectively, of total netsales.  No other customers represented over 10% of total net sales in eitherperiod.  We have provided products and services to Pfizer under three separatecontracts: multi-year worldwide licenses to our discovery software products,multi-year collaborative software development project and a $90 millionfour-year discovery research project to design and synthesize exclusivecompound libraries.  Revenues from the four-year discovery research contractwill end in the fourth quarter of 2005. 

** **

** **

** **

** **

| 14 |
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** **

**Item 1.  Financial Statements (continued)**

** **

**(6)     Inventory**

Our physical inventoryconsists of chemical compound libraries in various states of completion forLeadQuest, Lead Discovery and customer-specific chemistry research projects. Costs associated with the manufacture of compounds are calculated using thestandard cost method and are carried at the lower of cost (standard cost methodapproximating FIFO) or market.  Compounds that are acquired from third partiesare also carried at the lower of cost or market.  In calculating the reservefor obsolescence, collections of compounds are reviewed for their age, possibledegradation 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 reserve provision is taken.  A portion of the inventory is usedin discovery research projects.  Depreciation of this inventory is recorded inthe reserve for obsolescence over its 10-year expected useful life.  Work inprocess and finished goods inventory includes the accumulated cost of compoundsin production or awaiting shipment to customers under discovery research orcustom synthesis contracts.  Inventory balances at September 30, 2005 andDecember 31, 2004 were:

|                                                                                                                                      | **09-30-2005**         | 12-31-2004          |
|--------------------------------------------------------------------------------------------------------------------------------------|------------------------|---------------------|
|      Raw materials                                                                                          | **$1,813 **       | $ 2,124   |
|      Work in process                                                                                        | **3,939 **        | 6,594          |
|      Finished goods                                                                                         | **5,502 **        | 6,815          |
|      Reserve for  obsolescence                                                                              | **(3,174)**            | (3,526)             |
|          Total  inventory                                                               | **$8,080 **       | $ 12,007  |
| Costs of customer-related discovery research  projects included      in Work in Process and Finished Goods above | **$ 3,153 ** | $ 7,468   |

** **

** **

** **

**(7)     Long-termInvestments**

Since 2001, we haveinvested in the Life Science Ventures II fund administered by A.M. Pappas. This fund invests in new and developing companies in the life science sector.  Ourinvestment commitment of $2,500 represents approximately 2.2% of the totalcapital of the fund.  As of September 30, 2005 we had invested $1,975 or 79% ofour total commitment.  The fund records investment impairments when identified,for which we recognize our pro-rata share of such impairments.  The fund'smanagers determine whether certain investments are impaired.  We recorded ourpro-rata share of the fund's investment impairments that totaled $88 in thefirst quarter of 2005 and $58 in the second quarter of 2004.  In the thirdquarter of 2005, we recorded a gain of $305 upon receipt of our pro-rata shareof the proceeds from the sale of the fund's holdings in PeninsulaPharmaceuticals.

| 15 |
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**Item 1.  Financial Statements (continued)**

** **

**(8)     Time-basedSoftware License Arrangements**

Certain time-basedsoftware license arrangements are covered by agreements whose terms generallyrange from one to three years.  Revenue from these time-based software licensearrangements is recognized ratably over the agreed term.  The following tableshows the amount of revenues to be recognized from these arrangements after therespective balance sheet dates:

|  | Revenues to be  recognized in:    | **09-30-2005**    |   |
|--|-----------------------------------|-------------------|--------|
|  |    2005            | **$ 5,437**  |        |
|  |    2006            | **11,927**        |        |
|  |    2007            | **5,562**         |        |
|  |    2008  and later | **717**           |        |
|  | Total                             | **$ 23,643** |        |

Tripos is typically paidannually under these contracts.  Shown below are the amounts to be billed underthese contracts subsequent to the respective balance sheet dates (amounts notincluded in the accompanying balance sheets).

|  | Amounts to be billed  in: | **09-30-2005**    |   |
|--|---------------------------|-------------------|--------|
|  |    2005    | **$ 1,732**  |        |
|  |    2006    | **7,896**         |        |
|  |    2007    | **1,570**         |        |
|  |    2008    | **91**            |        |
|  | Total                     | **$ 11,289** |        |

**(9)     Goodwilland Other Intangible Assets**

At September 30, 2005and December 31, 2004, the Company had the following intangible asset balances:

|                        |  | **September 30, 2005** |            | December 31, 2004 |
|------------------------|--|------------------------|------------|-------------------|
|                        |  | **Gross**              | ** ** | ** **        |  | Gross |  |  |
|                        |  | **Carrying**           | ** ** | **Accumulated**   |  | Carrying |  | Accumulated |
|                        |  | **Amount**             | ** ** | **Amortization**  |  | Amount |  | Amortization |
| Acquired software      |  | **$3,590**             | ** ** | **$287 **    |  | $ -- |  | $ -- |
| Noncompete agreements  |  | **350**                | ** ** | **69 **      |  | -- |  | -- |
| Patents and trademarks |  | **192**                | ** ** | **101 **     |  | 183 |  | 93 |
| Total                  |  | **$ 4,132**       | ** ** | **$457 **    |  | $ 183 |  | $ 93 |

Amortization expense wasapproximately $121 and $3 for the three-month periods ended September 30, 2005and 2004, and $364 and $8 for the nine-month periods, respectively.  Estimatedannual amortization expense for the next 5 years is: 2005 - $486; 2006 - $486;2007 - $476; 2008 - $475 and 2009 - $391.

The changes in thecarrying amount of goodwill for the nine months ended September 30, 2005 are asfollows:

|                                       |  | Discovery    |  | Discovery  |  |              |
|---------------------------------------|--|--------------|--|------------|--|--------------|
|                                       |  | Informatics  |  | Research   |  | Total        |
| Balance at December  31, 2004         |  | $ --    |  | $ 965 |  | $ 965   |
| Acquisition of Optive  Research, Inc. |  | 4,308        |  | --         |  | 4,308        |
| Balance at  September 30, 2005        |  | $ 4,308 |  | $ 965 |  | $ 5,273 |

The goodwill amountsshown above are not tax deductible.

** **

** **

| 16 |
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**Item 1.  FinancialStatements (continued)**

** **

**(10)     DebtFacilities**

We have existing creditfacilities provided by LaSalle Bank in the form of a revolving line of creditand a mortgage loan for our corporate headquarters building, both amended inApril 2005.  The credit facilities are collateralized by substantially all ofour U.S. assets and stock pledges for each of the U.S. and U.K. subsidiaries.

The mortgage note callsfor even quarterly principal payments based on a twenty-year amortizationschedule.  Borrowings under the mortgage are subject to a variable interestrate at LIBOR plus 2.25%.  Interest rates paid by the Company on the mortgageaveraged 5.30% during the nine months of 2005.  As of September 30, 2005,$3,698 was remaining on the mortgage. The April 2005 amendment extended thematurity of the mortgage from December 2, 2005 to April 18, 2008, thereforeamounts due in excess of one year, $3,480, have been classified as long-termliabilities while $218 remains classified as short-term.  At December 31, 2004,the balance owed on the mortgage note of $3,914 was presented as a currentliability on the balance sheet since it was due within a one-year period.

The amended revolvingfacility is a one-year commitment for a $6,500 line of credit, requiringinterest-only payments with borrowings due at the end of the agreement.  Theagreement will expire on April 18, 2006.  Borrowings under the revolving lineof credit bear interest at variable rates tied to LIBOR or the bank's primerate.  Covenants under the amended revolving facility remain the same andinclude minimum interest coverage, minimum shareholders' equity, maximumcapital expenditure and an annual "clean down" period of 30consecutive days in which no borrowings are outstanding.  The clean downrequirement must be met each 12-month period running from April 19 and April18.  We were in compliance with all covenants as of September 30, 2005.  Forthe period ended September 30, 2004 we were not in compliance with the interestcoverage covenant due to the accrual of anticipated losses on a DiscoveryInformatics Services contract in December 2003 and the absence of gains fromthe sale of Arena Pharmaceutical shares in the trailing twelve-month period. LaSalle Bank granted a waiver of the violation at that time.  The line ofcredit carries a commitment fee of 3/8% of the unused portion of the line.  AtSeptember 30, 2005, September 30, 2004 and December 31, 2004, we had borrowingsoutstanding of $1,900, $200 and $600, respectively.  We met the annual"clean down" provision for the current year in September 2005.  Dueto the one-year commitment of the amended credit facility, draws on the line ofcredit are classified as short-term debt.

In connection with theOptive acquisition, the Company issued a subordinated promissory note toHorizon Technology Finance with a face value of $3,500 and a stated interestrate of 11.42%.  The repayment terms of the promissory note require monthlyinterest only payments of $33 for the first 18 months, followed by 30 monthlypayments of $135 beginning on August 1, 2006.  Each payment of principal willbe accompanied by payment of accrued but unpaid interest to the date of thepayment. The subordinated promissory note contains prepayment penalties.   Inaddition, as part of the financing transaction, 112 shares of common stock wereissued to Horizon and Sand Hill Capital at a discounted price of $4.48 pershare.  156 warrants to purchase common stock were issued to Horizon at anegotiated price of $4.48.  When taken as a whole, these transactions resultedin an original issuance debt discount of $222 that is being amortized tointerest expense over the life of the loan.

| 17 |
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**Item 1.  FinancialStatements (continued)**

** **

** **

**(11)     BusinessCombination**

On December 22, 2004 weannounced an agreement to acquire Optive Research, Inc. ("Optive"), aU.S. software company offering discovery informatics products complementarywith our own to the pharmaceutical and biotechnology industry.  We acquiredOptive to maintain access to products presently being distributed by us and togain access to new technologies being developed.  The transaction was completedon January 5, 2005, for consideration including cash and stock.  Theacquisition was accomplished through a merger of a newly−formed,wholly−owned subsidiary of Tripos with and into Optive, with Optivesurviving as our subsidiary.  Under the terms of the agreement, we issued 600shares of our common stock with a value of $3,183 (a portion of which isrestricted and will vest evenly on a semi-annual basis over 2 years) and $4,770in cash to Optive's former shareholders.  The cash portion was funded by agroup of new investors through the issuance of $3,500 of subordinated debtbearing an interest rate of 11.42%, 112 shares of common stock with anegotiated value of $500 and warrants to purchase 156 shares of common stock at$4.48 per share.  Optive's operating revenues prior to the acquisition wereapproximately $2,400, including nearly $900 of royalty payments made by us. The purchase price, including estimated direct acquisition costs, has beenallocated as follows:

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

Supplemental proformainformation is not presented because the acquisition is not considered to bematerial.  Optive's results of operations are included in our consolidatedstatements of operations from the date of acquisition.

| 18 |
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**Item 1.  FinancialStatements (continued)**

** **

**(12)     Segments**

Tripos operates in twoindustry segments, Discovery Informatics and Discovery Research.  The Company'sDiscovery Informatics segment designs, or in-licenses, and sells licenses tosoftware suites that provide computer-aided molecular modeling andvisualization, visual screening, combinatorial library design, data storage andanalysis, and structure-activity relationships to customers in pharmaceutical,biotechnology and related life science fields of research.  Tripos' DiscoveryResearch segment provides drug discovery services to pharmaceutical andbiotechnology companies.  High-end services offered are based on application byTripos of its proprietary high-throughput combinatorial chemistry, and ourChemSpaceTM database searching and selection technologies, includingthe Lead HoppingTM method for quick identification of alternativechemistries for the customer's needs.

Summarized financialinformation concerning the industry segments follows:

DI=Discovery Informatics

DR=Discovery Research

|                                                             | ** ** | ** **                         |
|-------------------------------------------------------------|------------|------------------------------------|
|                                                             | ** ** | **Three-Months End September 30,** |
|                                                             |            | **2005**                           |  | 2004 |
|                                                             |            | **DI**                             | **DR** | **Total** |  | DI | DR | Total |
| Revenues:                                                   |            |                                    |  |  |  |  |  |  |
| DI products                                                 |            | **$6,628**                         | **$ -- ** | **$6,628 ** |  | $6,029 | $-- | $6,029  |
| DI services                                                 |            | **716**                            | **-- ** | **716 ** |  | 1,247 | -- | 1,247  |
| DR products &  services                                 |            | **--**                             | **5,821 ** | **5,821 ** |  | -- | 8,824 | 8,824  |
| Total  revenues                                             |            | **$7,344**                         | **$5,821 ** | **$13,165 ** |  | $7,276 | $8,824 | $16,100  |
|                                                             |            | ** **                         | ** ** | ** ** |  |  |  |  |
| Depreciation & amortization                             |            | **$372**                           | **$884 ** | **$1,256 ** |  | $254 | $718 | $972  |
| Corporate non-allocated                                     |            | ** **                         | ** ** | **71 ** |  |  |  | 114  |
| Depreciation & amortization  on statement of operations |            | ** **                         | ** ** | **$1,327 ** |  |  |  | $1,086  |
|                                                             |            | ** **                         | ** ** | ** ** |  |  |  |  |
| Operating income                                            |            | **$1,523**                         | **$(143)** | **$1,380 ** |  | $801 | $1,680 | $2,481  |
| Non-allocated corporate  department expense                 |            | ** **                         | ** ** | **(1,636)** |  |  |  | (1,746) |
| Operating income (loss) on  statement of operations         |            | ** **                         | ** ** | **$(256)** |  |  |  | $735  |
|                                                             |            | ** **                         | ** ** | ** ** |  |  |  |  |
| Long-lived assets                                           |            | **$17,633**                        | **$23,210 ** | **$40,843 ** |  | $9,510 | $23,344 | $32,854  |
|                                                             |            | ** **                         | ** ** | ** ** |  |  |  |  |
| Total assets (1)                                            |            | **$30,025**                        | **$35,092 ** | **$65,117 ** |  | $19,197 | $40,829 | $60,026  |
| Consolidated cash                                           |            | ** **                         | ** ** | **3,566 ** |  |  |  | 4,768  |
| Total assets  on balance sheet                              |            | ** **                         | ** ** | **$68,683 ** |  |  |  | $64,794  |

(1)           Excludes cash and cash equivalents of $3,566 and $4,768 in 2005 and2004, respectively as cash and cash equivalents are monitored on a consolidatedbasis.

| 19 |
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**Item 1.  FinancialStatements (continued)**

** **

**(12)     Segments(continued)**

|                                                             | ** ** | ** **                        |
|-------------------------------------------------------------|------------|-----------------------------------|
|                                                             | ** ** | **Nine-Months End September 30,** |
|                                                             |            | **2005**                          |  | 2004 |
|                                                             |            | **DI**                            | **DR** | **Total** |  | DI | DR | Total |
| Revenues:                                                   |            |                                   |  |  |  |  |  |  |
| DI products                                                 |            | **$18,761**                       | **$--** | **$18,761 ** |  | $18,323 | $-- | $18,323  |
| DI services                                                 |            | **1,964**                         | **--** | **1,964 ** |  | 2,681 | -- | 2,681  |
| DR products &  services                                 |            | **--**                            | **20,842** | **20,842 ** |  | -- | 26,459 | 26,459  |
| Total  revenues                                             |            | **$20,725**                       | **$20,842** | **$41,567 ** |  | $21,004 | $26,459 | $47,463  |
|                                                             |            | ** **                        | ** ** | ** ** |  |  |  |  |
| Depreciation & amortization                             |            | **$1,065**                        | **$2,317** | **$ 3,382 ** |  | $788 | $2,116 | $2,904  |
| Corporate non-allocated                                     |            | ** **                        | ** ** | **252 ** |  |  |  | 327  |
| Depreciation & amortization  on statement of operations |            | ** **                        | ** ** | **$3,634 ** |  |  |  | $3,231  |
|                                                             |            | ** **                        | ** ** | ** ** |  |  |  |  |
| Operating income                                            |            | **$3,551**                        | **$1,037** | **$4,588 ** |  | $2,729 | $4,231 | $6,960  |
| Non-allocated corporate  department expense                 |            | ** **                        | ** ** | **(4,664)** |  |  |  | (5,414) |
| Operating income on  statement of operations                |            | ** **                        | ** ** | **$(76)** |  |  |  | $1,546  |
|                                                             |            | ** **                        | ** ** | ** ** |  |  |  |  |
| Long-lived assets                                           |            | **$17,633**                       | **$23,210** | **$40,843 ** |  | $9,510 | $23,344 | $32,854  |
|                                                             |            | ** **                        | ** ** | ** ** |  |  |  |  |
| Total assets (2)                                            |            | **$30,025**                       | **$35,092** | **$65,117 ** |  | $19,197 | $40,829 | $60,026  |
| Consolidated cash                                           |            | ** **                        | ** ** | **3,566 ** |  |  |  | 4,768  |
| Total assets  on balance sheet                              |            | ** **                        | ** ** | **$68,683 ** |  |  |  | $64,794 |

(2)           Excludes cash and cash equivalents of $3,566 and $4,768 in 2005 and2004, respectively as cash and cash equivalents are monitored on a consolidatedbasis.

**(13)     NewAccounting Pronouncements**

In November 2004, theFinancial Accounting Standards Board ("FASB") issued Statement ofFinancial Accounting Standards ("SFAS") No. 151 "InventoryCosts-an amendment of ARB No. 43, Chapter 4" ("FAS 151").  FAS151 clarifies the accounting for abnormal amounts of idle facility expense,freight, handling costs, and wasted material (spoilage) to require that theseitems be included as current-period charges and not included in overhead.  Inaddition, FAS 151 requires that allocation of fixed production overheads to thecosts of conversion be based on the normal capacity of the productionfacilities.  The provisions in FAS 151 are effective for inventory costsincurred during fiscal years beginning after June 15, 2005.  We are in theprocess of evaluating the requirements of FAS 151 but do not expect theadoption of FAS 151 to have a significant effect on our financial statements.

In December 2004, the FASB  issued SFAS No. 123 (revised 2004), "Share-Based Payment"  ("FAS 123R"), which revises and replaces SFAS No. 123,  "Accounting for Stock-Based Payment" and supercedes APB Opinion No.  25, "Accounting for Stock Issued to Employees".  FAS 123Rrequires the measurement of all 

| 20 |
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----

**Item 1.  FinancialStatements (continued)**

**(13)     NewAccounting Pronouncements (continued)**

share-based payments toemployees, including grants of employee stock options, using a fair-value basedmethod and the recording of such expense in our consolidated statements ofoperations.  The pro-forma disclosures previously permitted under SFAS No. 123will no longer be an alternative to financial statement recognition.  Theprovisions of FAS 123R were to have been effective for reporting periodsbeginning after June 15, 2005.  At the end of March, the SEC staff releasedStaff Accounting Bulletin No. 107 (SAB 107), providing guidance for implementingFASB Statement No. 123 (revised 2004), *Share-Based Payment* (Statement123R).  Subsequently, the Commission delayed the implementation dates forStatement 123R to the start of a Company's fiscal year.  As a result, we willbe required to comply with the provisions of FAS 123R beginning January 1,2006.  We are currently evaluating the requirements of FAS 123R, but because weare presently accounting for employee stock option grants in a footnotedisclosure as permitted by SFAS No. 123, the adoption of FAS 123R will have animpact on our results of operations effective upon adoption.

In May 2005, the FASBissued SFAS No. 154 "Accounting Changes and Error Corrections-areplacement 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 for accountingchanges and corrections of errors made in fiscal years beginning after December15, 2005.

In May 2005, the FASBissued FASB Staff Position No. EITF 00-19-1 "Application of EITF Issue No.00-19 to Freestanding Financial Instruments Originally Issued as EmployeeCompensation" ("FSP EITF 00-19-1").  FSP EITF 00-19-1 providesguidance on how to assess whether an issuer has the ability to control the formof settlement for options and share rights originally issued as employeecompensation.  When these options and shares originally issued as employeecompensation can only be settled by delivering registered shares, then FSP EITF00-19-1 nullifies the provisions of EITF 00-19 that require the assumption ofcash settlement and thus classified as an asset or liability.  The terms ofsuch instruments are to be evaluated using paragraph 34 of FAS 123R todetermine whether they should be recorded as equity or liabilities.  Theguidance in FPS EITF 00-19-1 is applied in accordance with the effective dateand transition provisions of FAS 123R.  As discussed above, we are currentlyevaluating the requirements of FAS 123R and will consider the additionalguidance provided by FSP EITF 00-19-1 in our evaluation.  

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On July 14, 2005, the FASBissued an exposure draft "Proposed Interpretation -- Accounting forUncertain Tax Positions, an interpretation of FASB Statement No. 109". This proposed Interpretation would clarify the accounting for uncertain taxpositions in accordance with FASB No. 109, *Accounting for Income Taxes*. An enterprise would be required to recognize, in its financial statements, thebest estimate of the impact of a tax position only if that position is probableof being sustained on audit based solely on the technical merits of theposition.  This proposed Interpretation should be effective as of the firstfiscal year ending after December 15, 2005.  Only tax positions that meet theprobable recognition threshold at that date may be recognized.  The cumulativeeffect of initially applying this proposed Interpretation would be recognizedas a change in accounting principle as of the end of the period in which thisproposed Interpretation is adopted.  Restatement of previously issued interimor annual financial statements and proforma disclosures for prior periods isnot permitted.

** **

**(14)     Restatement**

** **

On February 28, 2006, managementconcluded and the Audit  Committee of the Board of Directors agreed that theCompany's condensed consolidated financial statements included in its QuarterlyReports on Form 10−Q for the fiscal quarters ended March 31, 2005, June30, 2005 and September 30, 2005 should be restated to correct an error relatingto accounting for foreign exchange transaction gains and losses from certainintercompany transactions and that such previously filed financial statementsshould no longer be relied upon.  This conclusion was reported in a CurrentReport on Form 8-K filed March 6, 2006.  The error found by management in aconsolidating financial statement spreadsheet application used solely for 2005interim reporting related to foreign currency translation gains and losses fromintercompany transactions that should have been recorded in "Other income andexpense" on the statement of operations instead of "Other comprehensive income"within the shareholders' equity section of the balance sheet.  All other assetand liability accounts in the balance sheet and operating activity on thestatement of operations were properly reported.  This error affected foreigntranslation effects for the periods ending March 31, June 30 and September 30,2005.  Previously reported amounts for 2004 were not affected by this error.

The following tablespresent the effects of the restatement in the Consolidated Statement ofOperations and Consolidated Balance Sheets as of the period ended September 30,2005.

**TRIPOS, INC.**

**CONSOLIDATED STATEMENTSOF OPERATIONS**

|  (In  thousands, except per share data)                    | Three Months Ended      |                    | Nine Months Ended |
|-----------------------------------------------------------------|-------------------------|-------------------------|-------------------|
|                                                                 | As Reported

09-30-2005 | As Restated

09-30-2005 |              | As Reported

09-30-2005 | As Restated

09-30-2005 |
| Net  sales:                                                     |                         |                         |                   |  |  |
|    Discovery  informatics products & support | $ 6,618       | $ 6,618       |                   | $ 18,730  | $ 18,730  |
|    Discovery  informatics services               | 716                | 716                |                   | 1,964  | 1,964  |
|    Discovery  research products & services   | 5,821              | 5,821              |                   | 20,842  | 20,842  |
|    Hardware                                      | 10                 | 10                 |                   | 31  | 31  |
| Total net sales                                                 | 13,165             | 13,165             |                   | 41,567  | 41,567  |
|                                                                 |                         |                         |                   |  |  |
| Cost  of sales                                                  | 6,067              | 6,067              |                   | 20,860  | 20,860  |
| Gross profit                                                    | 7,098              | 7,098              |                   | 20,707  | 20,707  |
|                                                                 |                         |                         |                   |  |  |
| Operating  expenses:                                            |                         |                         |                   |  |  |
|    Sales  and marketing                          | 2,556              | 2,556              |                   | 8,186  | 8,186  |
|    Research  and development                     | 2,898              | 2,898              |                   | 6,810  | 6,810  |
|    General  and administrative                   | 1,900              | 1,900              |                   | 5,787  | 5,787  |
| Total operating expenses                                        | 7,354              | 7,354              |                   | 20,783  | 20,783  |
|                                                                 |                         |                         |                   |  |  |
| Income (loss) from operations                                   | (256)                   | (256)                   |                   | (76) | (76) |
|                                                                 |                         |                         |                   |  |  |
| Interest  expense                                               | (478)                   | (478)                   |                   | (1,259) | (1,259) |
| Other  income (loss), net                                       | 117                | 311                |                   | 146  | (346) |
| Income (loss) before income taxes                               | (617)                   | (423)                   |                   | (1,189) | (1,681) |
|                                                                 |                         |                         |                   |  |  |
| Income  tax expense (benefit)                                   | (583)                   | (583)                   |                   | (2,633) | (2,633) |
| Net income (loss)                                               | $ (34)             | $ 160         |                   | $ 1,444  | $ 952  |
|                                                                 | ** **              |                         |                   |  |  |
| Basic  income (loss) per share                                  | $ (0.00)           | $ 0.02        |                   | $ 0.14  | $ 0.09  |
| Basic  weighted average number of shares                        | 10,114             | 10,114             |                   | 10,088  | 10,088  |

** **

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----

| Diluted  income (loss) per share           | $ (0.00) | $ 0.02  |  | $ 0.14   | $ 0.09   |
|--------------------------------------------|---------------|-------------------|--|--------------------|--------------------|
| Diluted  weighted average number of shares | 10,114   | 10,143       |  |  10,132  |  10,132  |

**TRIPOS, INC.**

**CONSOLIDATED BALANCESHEETS**

** **

| (In  thousands)                                                                                                                                                                       | As Reported 

09-30-2005 | As Restated 

09-30-2005 |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------|-------------------------------|
| ASSETS                                                                                                                                                                                |                               |                               |
| Current  assets:                                                                                                                                                                      |                               |                               |
|      Cash  and cash equivalents                                                                                                                              | $ 3,566             | $ 3,566             |
|      Marketable  securities                                                                                                                                  | --                       | --                       |
|      Accounts  receivable, less allowances for doubtful accounts of **$238**                                                                                 | 9,301                    | 9,301                    |
|      Inventory                                                                                                                                               | 8,080                    | 8,080                    |
|      Deferred  income taxes                                                                                                                                  | --                       | --                       |
|      Prepaid  expenses                                                                                                                                       | 5,183                    | 5,183                    |
| Total current assets                                                                                                                                                                  | 26,130                   | 26,130                   |
|                                                                                                                                                                                       |                               |                               |
|    Property  and equipment, less accumulated depreciation                                                                                                              | 28,354                   | 28,354                   |
|    Capitalized  development costs, less accumulated amortization                                                                                                       | 3,541                    | 3,541                    |
|    Goodwill                                                                                                                                                            | 5,273                    | 5,273                    |
|    Intangible  assets, less accumulated amortization                                                                                                                   | 3,675                    | 3,675                    |
|    Investments  recorded at cost                                                                                                                                       | 1,710                    | 1,710                    |
|    Other  assets, net                                                                                                                                                  | --                  | --                  |
| Total assets                                                                                                                                                                          | $ 68,683            | $ 68,683            |
|                                                                                                                                                                                       |                               |                               |
| LIABILITIES  AND SHAREHOLDERS' EQUITY                                                                                                                                                 |
| Current  liabilities:                                                                                                                                                                 |                               |                               |
|      Current  portion of long-term debt                                                                                                                      | $ 2,321             | $ 2,321             |
|      Current  portion of capital leases                                                                                                                      | 3,207                    | 3,207                    |
|      Accounts  payable                                                                                                                                       | 1,114                    | 1,114                    |
|      Accrued  expenses                                                                                                                                       | 3,283                    | 3,283                    |
|      Deferred  revenue                                                                                                                                       | 15,677                   | 15,677                   |
|      Deferred  income taxes                                                                                                                                  | 281                      | 281                      |
| Total current liabilities                                                                                                                                                             | 25,883                   | 25,883                   |
|                                                                                                                                                                                       |                               |                               |
|    Capital  leases, less current portion                                                                                                                               | 2,017                    | 2,017                    |
|    Long-term  debt, less current portion                                                                                                                               | 6,595                    | 6,595                    |
|    Deferred  income taxes                                                                                                                                              | --                       | --                       |
| Shareholders'  equity :                                                                                                                                                               |                               |                               |
|      Common  stock, $0.01 par value; authorized 20,000 shares,       issued and outstanding 10,116 shares as of  September 30, 2005 | 101                      | 101                      |
|      Additional  paid-in capital                                                                                                                             | 41,332                   | 41,332                   |
|      Retained  earnings (deficit)                                                                                                                            | (6,646)                       | (7,137)                       |
|      Other  comprehensive loss                                                                                                                               | (599)                         | (108)                         |
| Total shareholders' equity                                                                                                                                                            | 34,188                   | 34,188                   |
|                                                                                                                                                                                       |                               |                               |
| Total liabilities and shareholders' equity                                                                                                                                            | $ 68,683            | $ 68,683            |

** **

** **

** **

** **

** **

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**TRIPOS, INC.**

**CONSOLIDATED STATEMENTSOF CASH FLOWS**

** **

| (In  Thousands)                                                                      | Nine Months Ended       |
|--------------------------------------------------------------------------------------|-------------------------|
|                                                                                      | As Reported

09-30-2005 | As Restated

09-30-2005 |
| **Operating  activities:**                                                           |                         |  |
| Net  income                                                                          | $1,444             | $952  |
| Adjustments  to reconcile net income to   net cash provided by operating activities: |                         |  |
|    Depreciation  of property and equipment                            | 3,121              | 3,121  |
|    Amortization  of capitalized development costs & intangibles   |  513          |  513  |
|    Amortization  of debt discount                                     |  42           |  42  |
|    Appreciation  (depreciation) in foreign currency hedge instruments | --                 | --  |
|    Gain  from sale of marketable securities                           | (240)                   | (240) |
|    Gain  from sale of property and equipment                          | --                 | --  |
|    Impairment  loss on long-term investment                           |  88           |  88  |
|                                                                                      |                         |  |
| Change  in operating assets and liabilities (excluding acquired business):           |                         |  |
|    Accounts  receivable                                               |  559          |  559  |
|    Inventories                                                        |  2,993        |  2,993  |
|    Prepaid  expenses and other current assets                         | (690)                   | (690) |
|    Accounts  payable and accrued expenses                             | (3,641)                 | (3,641) |
|    Deferred  tax benefit                                              | (1,288)                 | (1,288) |
|    Deferred  revenue                                                  | 318                | 318  |
| Net cash provided by operating activities                                            | 3,219              | 2,727  |
|                                                                                      |                         |  |
| **Investing  activities:**                                                           |                         |  |
| Purchases  of property and equipment                                                 | (880)                   | (880) |
| Capitalized  development costs                                                       | (1,470)                 | (1,470) |
| Acquisition  of business, net of cash received                                       | (4,770)                 | (4,770) |
| Proceeds  from the sale of marketable securities                                     | 426                | 426  |
| Proceeds  from the sale of property and equipment                                    | --                 | --  |
| Investment  in unconsolidated affiliates                                             | (133)                   | (133) |
| Net cash used in investing activities                                                | (6,827)                 | (6,827) |
|                                                                                      |                         |  |
| **Financing  activities:**                                                           |                         |  |
| Proceeds  from stock issuance pursuant to stock purchase and option plans            | 539                | 539  |
| Net  borrowings under revolving line of credit                                       | 1,300              | 1,300  |
| Proceeds  from issuance of long-term debt and capital leases                         | 5,554              | 5,554  |
| Payments  on long-term debt and capital lease obligations                            | (4,109)                 | (4,109) |
| Net cash provided by financing activities                                            | 3,284              | 3,284  |
|                                                                                      |                         |  |
| Effect  of foreign exchange rate changes on cash and cash equivalents                | (281)                   | 211  |
|                                                                                      |                         |  |
| Net decrease  in cash and cash equivalents                                      | (605)                   | (605) |
|                                                                                      |                         |  |
| Cash  and cash equivalents at beginning of period                                    | 4,171              | 4,171  |
| Cash and cash equivalents at end of period                                           | $ 3,566       | $ 3,566  |
|                                                                                      |                         |  |

** **

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**Item 2.  Management'sDiscussion and Analysis of Financial Condition and Results of Operations**

**Forward-lookingStatements**

The remainder of thisreport may contain certain statements that are forward-looking and involverisks and uncertainties.  Words such as "expects","anticipates", "projects", "estimates","intends", "plans", "believes", variations ofsuch words and similar expressions are intended to identify such forwardlooking statements.  These statements are based on current expectations andprojections made by management and are not guarantees of future performance. Therefore, actual events, outcomes and results may differ materially from whatis expressed or forecast in such forward-looking statements.  Among the factorsthat could cause actual results to differ materially from the forward-lookingstatements are set forth under the caption "Cautionary Statements --Additional Important Factors to be Considered" in Item 7, Management'sDiscussion and Analysis of Financial Condition and Results of Operations("MD&A") in Tripos' Form 10*-*K for 2004.  Tripos undertakesno obligation to update any forward-looking statements in this Form 10-Q.

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

** **

**Overview**

** **

We provide products andservices to the pharmaceutical, biotechnology, and life science industries tosupport early stage research activities.  Our offerings are applied principallyto assist research chemists to make decisions about the most productive newcompounds to make and test as potential therapeutics.  Through our ownchemistry laboratories, we can also make those compounds for our clients. Strategic partnerships allow us to coordinate screening and analysis ofcompounds for our clients.

The industries that weserve are highly research driven.  Industry trade publications state thatmature pharmaceutical companies typically spend between 12% and 20% of theirannual revenues on research in the search for new blockbuster drugs.  Thisresearch process consists of several phases from early discovery of compoundsof interest, through testing of the promising ones for activity and safety inanimals, to final testing of these compounds in humans.  Our offerings are mostrelevant to the initial phase of this activity.  Our products and services aredesigned and intended to provide our pharmaceutical and biotechnology customerswith improved ways to identify and select the most promising drug candidates totake forward into the more expensive and time consuming stages of the drugdevelopment process.  Depending on the number of compounds that a particular companyhas in different stages of their new therapeutic pipeline, it may reduce orincrease investment in the other phases of research.  Further, decisions by thepharmaceutical industry concerning their research investments are stronglyinfluenced by decisions by the various governments of the world regarding drugpricing and regulation.

Ourinformatics (software) products are sold on a renewable license basis, typicallywith a term of one to three years.  This business is generally predictableas we have historically experienced high renewal rates for licenses.  Ourmanagement closely monitors license expirations and deploys sales staff toensure the highest probability of renewals.  Our service businesses, bothinformatics and chemistry, are much less predictable.  The sales cycles forthese offerings are typically long -- from six months to eighteen months -- andare highly influenced by factors in the macro-economic environment, includingthe general state of the pharmaceutical industry and the political situations invarious parts of the world.  To forecast potential business in these 

| 25 |
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**Item 2.            Management'sDiscussion and Analysis of Financial Condition and Results of Operations(continued)**

areas, our managementstrives to closely interact with the management of our customers and is closelyinvolved in business development activities for service projects.

Large service contractsfor pharmaceutical research, both informatics and chemistry, are complex and,because they are deployed in research applications where outcomes areuncertain, have a large risk component.  Risk management in these projectsoften begins with the definition of project requirements and continues throughperformance metrics and customer acceptance milestones.  Due to the complexityof the projects and changing priorities within client organizations, it istypical that many decision points will arise that require management attentionboth at Tripos and at the client.  To mitigate the project difficulties, wehave developed a process focus in which management monitors milestones in theproject plan according to the process workflow.  Despite these efforts,however, some projects are of sufficient complexity that they presentchallenges that require revisions to the project plan and scope. 

Being a public companywith limited capital, we have focused on profitability and cashflow.  Thatsaid, the company has not always been profitable, but we have achievedprofitability in certain years.  Major investments, such as the recentexpansion of our chemistry research laboratories in England, have been fundedby the proceeds from the sale of certain investments, cash from operations,temporary use of debt capacity, and grant funding from the British government.

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 andindividual users.  Variations in licensing levels range from the lowhundred-thousands up to several million dollars.  The following aredescriptions of our current sales models for discovery software:

**Perpetuallicenses:**

Software license pricingis taken from our price list based on the quantity of individual modules andnumber of users.  Customers are billed upon delivery.  Revenue for softwarelicenses is recognized upon delivery of product and issuance of perpetualkeys.  Support pricing is a fixed percentage of the total current list price ofthe software purchased and is billed annually.  Perpetual license salesrepresent the smallest share of our informatics revenues.

We have analyzed theother elements included in multiple-element arrangements that involve perpetuallicenses, and determined that we have sufficient Vendor Specific ObjectiveEvidence ("VSOE") to allocate revenues to PCS and/or training.  VSOEfor PCS and training is established based upon the price charged when thoseelements are sold separately.  For PCS this is established based on the renewalrate specified in the arrangement, which is consistently priced at a percentageof the list price of the purchased licenses.  Training is charged consistentlyfrom our price list. 

**Bundledlicenses:**

In 1998, we began offering time-based bundled licenses as an alternativeto perpetual licenses.  This allows our customers to license multipleinformatics products bundled with PCS that is co-terminus with the period of thearrangement.  Bundled licenses have grown to become our largest source ofinformatics license revenues.  A bundled license includes specificinformatics modules, specified numbers of users of each module with all productand access keys delivered on or before the effective date of the contract. Informatics products are sold to professional users on an "off the shelf" basisin which the customer is responsible for installation.  Thesenon-cancelable, non-refundable contracts are normally three years in

| 26 |
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**Item 2. Management'sDiscussion and Analysis of Financial Condition and Results of Operations(continued)**

duration, althoughcertain customers request shorter or longer contract periods.  At the end ofthe contract term, the customer must renew the license or the products willcease to operate.  PCS, which includes unspecified updates, upgrades and"help desk" services, is included in the total price of thecontract.  The PCS provided under bundled arrangements is the same as thatprovided to customers under perpetual agreements.  Bundled license pricing istaken from our established price list for products (includes package pricingand a-la-cart pricing), number of users and length of term.  All contractedproducts are delivered at inception.  If the customer should want additionalmodules, users or new products upon their release, the customer must enter intoa new contract (or addendum) and pay the incremental fees to license theseitems.  Software revenue and PCS revenues under bundled license agreements arerecognized ratably over the contract term.

** **

**Termlicenses:**

Term licenses representone-year arrangements for informatics products with an additional charge forone-year of PCS.  The license fee is taken from our price list by product.  Thesupport renewal fee is a fixed percentage of the software license fee (similarto perpetual model).  The PCS provided under term contracts is the same as thatprovided to customers under all other arrangements.  Software license andsupport pricing are separately stated and billed upon delivery of product.  Tocontinue to operate the software, the customer must pay their annual renewalfee.  Software revenue and PCS revenues under these license agreements arerecognized ratably over the contract term.

Our informaticstechnologies for the integration of chemistry and biological data in the lifesciences industries creates a revenue stream for discovery informatics services(software consulting).  To serve this market, we maintain a staff ofspecialists who use our proprietary technology, such as MetaLayer,FormsBuilder, Benchware, Benchware Notebook, ChemCoreRIO and AUSPYXtechnologies to configure customized solutions for data management.  Revenuemay be generated on a billable rate per day, or upon achievement of milestonesor deliverables and is recognized as production activities are performed. These contracts may also generate substantial license fee revenue for ourproprietary informatics technologies.

We develop andmanufacture general screening compound libraries for sale to the life sciencesindustry for a fee per compound delivered.  This has created the opportunity tooffer follow-up discovery research activities to customers for design andsynthesis of focused libraries for lead optimization.  We also market a comprehensiveresearch process to our life sciences customers for rapid and cost effectivediscovery.  This process combines advanced informatics, chemistry and access tobiology products and services, along with proprietary discovery technologiesfor efficient lead development, refinement, and optimization resulting in atightly integrated process to facilitate synergies in drug discovery. 

We also act as areseller of computer hardware.  Hardware sales are generally made to facilitateour customers' access to hardware components and are not a primary focus of oursales activities.  We act as an authorized reseller and only order products onan "as needed" basis.  Products are shipped directly to the customer,thus we do not maintain an inventory.  Margins on these sales are relativelymodest.

We licensediscovery informatics tools to customers, provide ongoing support (includingupgrades selected by customers) and provide informatics services to customersthat enable integration of our existing and newly developed tools to customers'discovery operations.  We generally expense research and development costsassociated with informatics 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 ofinformatics product sales.  Certain informatics product developmentprojects require 

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**Item 2.  Management'sDiscussion and Analysis of Financial Condition and Results of Operations  (Continued)**

substantial commitmentsof time and resources.  Costs of these projects are capitalized uponachievement of technological feasibility and/or a working model according toFinancial Accounting Standards Board ("FASB") Statement of FinancialAccounting Standards ("SFAS") No. 86.

Quarterly expensesinclude the costs of research and development for software development and newchemistry research.  We believe that core sales and marketing costs will varyas a percentage of sales and that administrative costs will remain generallyconsistent.  Variability in quarterly expenses primarily occurs in relation tothe level of revenues.  This is due to sales compensation, bonuses, staffingfor selling and periodic marketing activities such as appearances at tradeexhibitions.

Ourrevenues and expenses vary from quarter to quarter depending upon, among otherthings, the timing of customers' budget processes, the success of our salesefforts, the lengthy sales cycle and our ability to influence customers andprospective customers to make decisions to outsource portions of theirdiscovery process, the size of the customers' capital expenditure budgets, theimpact of the initiation and completion of significant contracts relative toour overall revenue base, the ability to produce compound libraries in a timelymanner, market acceptance of new products and enhanced versions of existingproducts, the timing of new product introductions by us and other vendors,changes in pricing policies (ours, partners and other vendors), consolidationin customer base, client involvement in decision points in contracts related toproject plans, our ability to accurately match contract costs to milestone orcontract performance requirements on our larger collaborative arrangements, andchanges in general economic and competitive conditions.  Fluctuations in ourquarterly revenues and earnings are caused principally by sales of compounds orby achievement of milestones on specific longer-term projects.  Our managementteam monitors quarterly business activity with the aid of sales pipelinereports and monthly financial reports.

** **

**Results of Operations**(Amounts in thousands,except per share amounts)

**Net sales** for the third quarterof 2005 were $13,165 compared to $16,100 in 2004, a decrease of 18%.  Discovery informaticsproducts and support sales increased 10% to $6,618 in 2005 from $6,005 for sameperiod in 2004.  This increase reflects recording business in the Pacific Rimterritory that was delayed due to a patent infringement case in Japan relatingto a software product that we in-license from a third-party.  The third-partyintroduced what we believe to be a non-infringing version of the software inthe second quarter and our distributor in Japan was able to close approximately$200 of previously delayed transactions.  In addition, we completed an earlytermination agreement with a customer resulting in $373 of revenue in the thirdquarter of 2005.  Discovery informatics services revenues for the third quarterof 2005 decreased 43% to $716 from $1,247 in 2004.  The reduction in thisarea's revenues was attributable to the timing and size of ongoing projects inthe current year.  The timing of revenue recognition from discovery informaticsservices is typically subject to achievement of contractual milestones and thusvaries from period to period.  Discovery research sales accounted for $5,821 inthe third quarter of 2005 and $8,824 in the same period in 2004, a decrease of34%.  This decrease in discovery research business was principally attributedto lower levels of production on the four-year, $90 million strategic compoundfile enrichment and hit follow-up contract with Pfizer (the "PfizerContract") that was partially offset by incremental work for othercustomers.  As previously disclosed, revenues from the Pfizer Contract wereexpected to be lower in 2005 than 2004 and are scheduled to complete in thefourth quarter of 2005.  Hardware sales decreased by 58% to $10 for the thirdquarter 2005 from $24 in 2004.  We do not actively market hardware products,but rather only facilitate customer demand when required.

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**Item 2.  Management'sDiscussion and Analysis of Financial Condition and Results of Operations (Continued)**

For the nine-monthperiod in 2005, total net sales decreased 12% to $41,567 from $47,463 for thesame period in 2004.  The decrease was primarily the result of the lowerscheduled production levels of the previously mentioned discovery researchcontract with Pfizer.  Discovery software and support sales were up by 3% forthe nine-month period in 2005 to $18,730 compared to $18,225 in 2004 dueprimarily to the incremental revenues from Optive.  Discovery research revenuesdecreased by 21% for the first nine months in 2005 to $20,842 from $26,459. The decrease in discovery research revenues was principally from the lowercontracted production levels in the Pfizer compound file enrichment project. Revenues from discovery informatics services declined by 27% to $1,964 in 2005from $2,681 in 2004's nine-month period.  The reduction in discoveryinformatics service revenues reflects the timing and size of ongoing serviceprojects and achievement of related contractual milestones in the period.

Netsales for the Company's activities outside of North America representedapproximately 73% and 80% for the three-month periods ending September 30, 2005and 2004, respectively.  North American net sales accounted for roughly 28% of2005 and 20% of 2004 total third quarter sales.  Net sales in Europe accountedfor 67% and 76%, respectively, of total sales the third quarter of 2005compared to 2004.  Net sales in the Pacific Rim increased by 20% for the thirdquarter of 2005 compared to the same period in 2004.  The increase wasprimarily the result of recording revenues that had been delayed pending theoutcome of the patent infringement matter described earlier.  As indicated, theowner of the infringing software introduced a replacement technology.  ThePacific Rim accounted for 6% and 4% of net sales for the third quarter in 2005and 2004, respectively.

** **

**Cost of sales** for the three-monthperiod ending September 30, 2005 decreased 27% to $6,067 compared to $8,333 forthe same period in 2004.  Driving the decrease in overall cost of sales for thethird quarter of 2005 were lower costs due to reduced production on the Pfizermulti-year chemistry contract (a reduction of $1,715), lower costs of discoveryinformatics services projects (a reduction of $751) and a net increase indiscovery informatics products cost of sales from the amortization ofinformatics product-related intangibles acquired in the Optive Researchtransaction (an increase of $213).  Cost of sales as a percent of net sales was46% and 52% for the three-month periods in 2005 and 2004, respectively. Nine-month year-to-date cost of sales declined 11% to $20,860 in 2005 from$23,435 in 2004.  Cost of sales was 50% and 49% of total net sales for 2005 and2004, respectively.  The main reduction in cost of sales came from loweramounts incurred in discovery research activities from the Pfizer compound fileenrichment project (a reduction of $2,278), lower discovery informaticsservices costs (a reduction of $610) due to lower revenues that were partiallyoffset by the incremental costs of amortizing the intangibles from the Optive acquisition(an increase of $355).

**Gross profit** margin for the thirdquarter 2005 improved to 54% of total net sales versus 48% in the third quarterof 2004.  The improvement in gross profit in the third quarter of 2005 wasprincipally the result of the mix of sales and their corresponding cost ofsales.  The third quarter of 2005 produced a shift back toward higher-margindiscovery informatics as compared to recent quarters.   This was primarilydriven by the anticipated lower levels of production on the Pfizer contractcompared to the prior year.  Nine-month year-to-date gross profit margindeclined to 50% in 2005 from 51% in the 2004 nine-month year-to-date period. The principal contributor to the year-to-date decrease in overall gross marginwas the increased costs of production as a percentage of related revenues onthe Pfizer contract.  Gross profit for the company is also dependent on costsof chemical materials and overhead, the mix of internal versus third-partysoftware product sales, foreign exchange rates and the company's ability tosuccessfully deliver on informatics contracts.

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**Item 2.  Management'sDiscussion and Analysis of Financial Condition and Results of Operations (Continued)**

**Sales and marketing** expenses decreased 17%to $2,556 for the third quarter of 2005 from $3,089 in the same period in2004.  For the nine-month year-to-date period in 2005, sales and marketingexpenses declined to $8,186 from $9,464 in 2004.  Sales and marketing expensesas a percentage of net sales were 19% in both three-month periods of 2005 and2004.  For the nine-month periods in 2005 and 2004, sales and marketingexpenses were 20% of the respective total net sales.  The decreases in salesand marketing spending totaling $533 and $1,278 for the quarter and year-to-dateperiods, respectively, were primarily attributable to lower employee costs fromopen positions, lower commissions and the expiration of certain consultingrelationships.

**Research and development**expensesincreased by 35% to $2,898 from $2,140 and represented 22% and 13% of net salesfor the three-month periods in 2005 and 2004, respectively.  The increase inR&D expense in the third quarter of 2005 was primarily attributable toapproximately $900 of incremental non-inventory chemistry-related costs asresources are redirected to other research activities as we wind downproduction on the Pfizer multi-year chemistry contract.   This incrementalR&D expense was partially offset by capitalization of $313 of softwaredevelopment costs related to new discovery informatics products that haveachieved technological feasibility.  There was no software capitalization inthe third quarter of 2004.  In addition, we did capitalize to inventory $636 ofcosts related to our innovative Lead Discovery chemistry projects in the thirdquarter of 2005 compared to $511 in 2004.  Year-to-date R&D expensedeclined by 8% to $6,810 in 2005 from $7,433 in 2004 and was 16% of total netsales in both years.  The principal contributors to the reduction ofyear-to-date R&D expenses were capitalization of software development cost(mainly Benchware components) totaling $1,470 in 2005 compared to $0 in 2004along with the inventoried costs of LeadDiscovery compounds of $1,485 in 2005compared to $754 in the 2004 nine-month period.  In addition, approximately$800 of incremental chemistry-related costs were incurred due to reducedproduction on the Pfizer contract.  In comparison, R&D expenses for thenine-month period in 2004 were reduced by a charge of  $813 against a pre-establishedreserve for losses on a discovery informatics service contract.

**General andadministrative**expensesincreased 5% to $1,900 from $1,803 for the third quarter of 2005 and 2004,respectively, and represent 14% and 11% of net sales for the corresponding periods. For the nine-month periods, G&A expense was increased 4% to $5,787 in 2005from $5,585 in 2004 and represented 14% and 12% of respective total net sales. Higher administrative costs at our expanded U.K. chemistry facility more thanoffset lower expenses in other areas.

**Interest expense**increased 59% to $478 inthe third quarter of 2005 from $301 in the third quarter of 2004. For thenine-month period, interest expense increased 54% to $1,259 in 2005 from $820in 2004.  The increases in interest expense in the three and nine-month periodswas primarily due to interest associated with the subordinated note issued forthe acquisition of Optive Research, Inc. that took place in January 2005 ($114in the third quarter and $339 year-to-date in 2005).  The remainder of theincrease is attributable to higher interest rates on the bank credit facilitiesand additional capital leases in 2005.

**Other  income and (loss), net**increased to income of $311 in the third quarter of 2005  from a loss of $67 in the same period in 2004.  The 2005 income resulted  primarily from interest income of $21 and a gain of $305 for our pro-rata  share of proceeds from the A.M. Pappas Life Science II fund for the sale of  Peninsula Pharmaceuticals.  These gains were partially offset by a currency  loss of $16 in the 2005 quarter.  For the third quarter of 2004, the loss  primarily resulted from a currency loss of $104 partially offset by interest  income of $48.  The nine-month period in 2005 generated other loss of $346 compared  to a loss of $5 in 2004.  The 2005 other loss included interest income of  $85, gains from the sale of NuVasive of $240, gains from the sale of PeninsulaPharmaceuticals of $305, an unrealized loss of $88 on our pro-rata share of aninvestment held in the Life Science II fund and currency losses of $890. In the same nine-month period of 

** **

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**Item 2.  Management'sDiscussion and Analysis of Financial Condition and Results of Operations (Continued)**

2004, other income wascomprised of a gain of $144 on the sale of shares of Arena Pharmaceuticals,Inc. coupled with interest income of $200 that were partially offset bycurrency losses of $338.  We completed the sale of our Arena holdings in thefirst quarter of 2004.

**Income tax** benefit was $2,633 forthe first nine-months of 2005 compared to income tax expense of $735 for thesame period in 2004, which represent effective tax rates of (157)% and 102%,respectively.  The effective tax rate for 2005 reflects the realization ofR&D tax credits in the U.K. for prior periods.  We were not able torecognize the R&D credits from those prior periods until such time as theybecame more likely than not to be approved by the U.K. tax authorities.  Duringthe first quarter of 2005, we received notice that credits from 2002 had been approved. Calculation of the 2003 and 2004 R&D credits were performed during thesecond quarter of 2005 and a tax benefit of over $2,100 was reflected in thecumulative tax position. During the third quarter of 2005, the follow-on effectof the credits from 2003 and 2004 were realized as additional benefits in theU.K. consolidated tax return. The 2005 income tax rate reflects management'scurrent estimate of the distribution of earnings among the statutoryjurisdictions in which we operate, realization of additional R&D taxcredits in the U.K. and the valuation of certain net operating losscarryforwards in 2005. 

** **

**Liquidity, Capital Resources and CapitalCommitments**

Net cash provided byoperations in the first nine-months of 2005 was $2,727.  The primary sources ofcash were from net income of $952, reductions in accounts receivable of $559,reductions in inventory of $2,993, increases in deferred revenue of $318 plusthe add-back of non-cash depreciation and amortization, including theamortization of debt discount of $3,676 combined and the write-down onlong-term investment of $88.  These increases of cash were partially offset bypayments of accounts payable and accrued expenses of $3,641, additions toprepaid expenses of $690 and a change in deferred tax benefit of $1,288 lessthe pre-tax gain of $240 from the sale of shares of NuVasive common stock.  Thechange in deferred tax benefit is a result of recording the R&D tax creditsin the U.K.  The timing of collections of accounts receivable and reductions ofdeferred revenues both continue regular annual cyclical patterns.  Reductionsin inventory levels principally reflect the status of the deliveries offinished goods to Pfizer.  Net cash provided by operations in the first ninemonths of 2004 was $11,048.  Sources of operating funds for the first ninemonths of 2004 were net collections of accounts receivable of $6,392,reductions in prepaid expenses of $2,039, reduction of inventories of $1,140,increased deferred revenue of $1,887 plus the add-back of non-cash depreciationand amortization expenses of a combined $3,412 and a net reduction in theamount of foreign currency forward contracts outstanding of $876.  Operatingfunds used in the first nine months of 2004 were for reductions of accountspayable & accrued expenses of $4,523 less the pre-tax gain of $144 from thesale of shares of Arena Pharmaceuticals common stock.  The primary differencesin cashflow from operations year-over-year arises from higher prepaid expensesin 2005, lower accounts receivable and corresponding lower levels of deferredrevenues partially offset by higher net income reduced inventory levels.

Cash  used in investing activities during the first nine months of 2005 totaled  $6,827 and were for property and equipment acquisitions of $880, capitalized  development costs for our discovery informatics software products of $1,470  and the cash used in the acquisition of Optive Research, Inc. of $4,770.   These were partially offset by $426 of gross proceeds from the sale of  NuVasive shares.  Over the next 12 to 18 months, we may be required tofund the remainder of our investment commitment ($525) to the A.M. Pappas LifeScience II Fund.  Cash used in investing activities in the first ninemonths of 2004 was $4,346.  The cash was used principally for theacquisition of capital expenditures of $4,524, investment in the A.M. PappasLife 

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**Item 2.  Management'sDiscussion and Analysis of Financial Condition and Results of Operations (Continued)**

Science Ventures II of$178 and was partially offset by the proceeds from the sale of Arena shares of$196 and proceeds from the sale of property and equipment of $169.

For the first ninemonths of 2005, $3,284 of cash was generated through financing activities fromthe issuance of common stock of $500, new capital leases at our researchfacility and for computer equipment totaling $2,054, issuance of subordinateddebt of $3,500 to fund part of the acquisition of Optive Research and theissuance of shares under our employee stock plans of $39.  We had a netincrease in outstanding borrowings on our line of credit with LaSalle Bank of$1,300.  Payments on our mortgage and capital leases during the period totaled$4,109.  For the nine-month period in 2004, the net cash used in financingactivities was $5,410, consisting of payments on bank loans and capital leasearrangements totaling $10,413, less proceeds from additional capital leases of$4,363 and the issuance of shares under our employee stock plans of $640.

** **

In April 2005, thecompany and LaSalle Bank executed an amendment to the existing creditfacility.  The modified revolving credit facility is now $6,500, which is anincrease of $500 in available credit.  The maturity date on the mortgageportion of the facility has been extended from December 2005 to April 2008. All other terms and conditions, including covenants, remain unchanged.  AtSeptember 30, 2005, we had borrowings outstanding of $1,900 on the line ofcredit that were included in short-term debt.  Also, earlier in 2005, wesecured additional capital leases of approximately $1,995 to finance equipmentfor our recently completed laboratory expansion. 

We believe that with ourcash, accounts receivable balances, cash flows from operations, access toavailable borrowings from LaSalle Bank, and additional capital leases, if any,we will be able to meet our liquidity and capital expenditure requirements forat least the next twelve months.  To the extent that we sustain any materialreduction in revenues resulting from contract terminations, expirations, orotherwise, we believe we would be able to reduce operating costs to be incloser alignment with expected revenue levels to conserve capital resources andmoderate any adverse effect on liquidity.  In addition, we expect that ourcapital expenditure requirements will be substantially lower than in recentyears due to the completion of our chemistry laboratory expansion.  Activitiesthat are not part of our normal operations may require additional sources offunding that are not presently identified.

** **

Despite current capitalmarkets uncertainties, we may decide to seek additional financing to supportour objectives to enhance product development, expand existing markets andenter new markets, expand our chemistry research capabilities, fund participationin new therapeutic collaborations, or enhance our capital base for otherpurposes.  In making decisions regarding access to additional capital, we willconsider the availability and terms of financing alternatives, as well as ourobjective to maintain financial flexibility to support planned andopportunistic growth of our business.  Additional capital may be in the form ofequity or debt securities, and may be raised in public offering or privateplacement transactions.  See "Management's Discussion and Analysis ofFinancial Condition and Results of Operations - Liquidity and CapitalResources", "Cautionary Statements - Additional Important Factors tobe Considered" and Note 12 of the Notes to Consolidated FinancialStatements in our Annual Report on Form 10-K for the year ended December 31,2004 for a discussion of the credit facilities available to us.

** **

Section 401 of the Actrequires companies to disclose all material off-balance sheet transactions,arrangements, obligations and other relationships.  For the periods endingSeptember 30, 2005 and 2004, Tripos had no off-balance sheet transactions orarrangements other than ordinary operating leases.

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**Item 2.  Management'sDiscussion and Analysis of Financial Condition and Results of Operations  (Continued)**

The table that followssummarizes existing contractual obligations by type:

|                                | **Payments due by period** |
|--------------------------------|----------------------------|
| Contractual Obligations        | Total                      | Less than 

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

5 years |
| Line of Credit  (a)       | $ 2,028               | $ 2,028 | $ -- | $ -- | $ -- |
| Mortgage (a)                   | 4,311                      | 447 | 3,864 | -- | -- |
| Capital Lease Obligations      | 5,754                      | 3,590 | 2,164 | -- | -- |
| Operating Leases               | 2,595                      | 680 | 942 | 578 | 395 |
| Subordinated Debt  (b)    | 4,373                      | 602 | 3,232 | 539 | -- |
| Purchase Obligations  (c) | --                         | -- | -- | -- | -- |
| Total                          | $ 19,061              | $ 7,347 | $ 10,202 | $ 1,117 | $ 395 |

(a)Interest rates on the floating rate long-term debt are assumed to be constantfor the purposes of this table.  For this table, we have assumed that $1,900 ofthe revolving credit facility is outstanding for one year from September 30,2005 and would generate an interest payable of $128 at a constant rate of6.75%.  For the mortgage loan we have assumed an interest rate of 6.27% untilmaturity in April 2008.

(b)    Includes interestaccruing at 11.42% and no early pay-off.

(c) Purchase Obligationsin the past represented commitments for material capital expenditures (buildingand equipment) related to the expansion our chemistry laboratory at TriposDiscovery Research and committed outsourcing of chemical production.  Now thatthe expansion is completed, there are no material commitments outstanding.

** **

** **

**Critical Accounting Policies**

For further discussionof the Company's critical accounting policies, please see the section entitled"Critical Accounting Policies" in Management's Discussion andAnalysis of Financial Condition and Results of Operations in Form 10-K for theyear ending December 31, 2004.  In addition, with the acquisition of Optive,which closed in the first quarter of 2005, management has determined that theaccounting policies related to goodwill and other intangible assets should beincluded as one of the Company's identified critical accounting policies.  Thecost of acquired companies is allocated first to their identifiable tangibleand intangible assets based on estimated fair values.  Costs allocated toidentifiable intangible assets are generally amortized on a straight-line basisover the remaining estimated useful lives of the assets.  The excess of thepurchase price over the fair value of identifiable assets acquired, net ofliabilities assumed, is recorded as goodwill and is subject to impairment testsat least annually as required by Statement of Financial Accounting StandardsNo. 142, "Goodwill and Other Intangible Assets."  If the impairmenttest indicates that the carrying value of goodwill exceeded its fair value, animpairment loss would be required to be recognized in the consolidatedstatements of operations in an amount equal to the excess carrying value. 

** **

Periodic reports on Form10-Q, Form 10-K and other filings with the Securities and Exchange Commission("SEC") on Form 8-K and S-8, can be found on the Tripos web site at www.tripos.comunder the heading Investor Relations - SEC Filings.

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**Item 3. Quantitative and Qualitative Disclosuresabout Market Risk**

Our exposure to financialmarkets risk is limited to foreign exchange variances and fluctuations ininterest rates.  The Company may be subject to a significant impact fromforeign exchange.  For example, the costs to perform the custom design andsynthesis contract with Pfizer are incurred in British pounds sterling while weare compensated for a large portion of the work in U.S. dollars.  As a result,our gross profit was, and may be again, adversely affected by a decline in theU.S. dollar against the pound.  We may, as we have at times in the past,mitigate this effect through foreign currency forward contracts whosemark-to-market gains or losses are recorded in "Other Income".

Our foreign exchangerisk is principally limited to currencies like the British pound and the Eurothat historically have exhibited only minor fluctuations although during 2004and 2005, these currencies have shown more significant variation.  Assetsoutside the United States are primarily located in England.  Our investments inforeign subsidiaries with a functional currency other than the U.S. dollar arenot hedged.  The net assets in foreign subsidiaries translated into U.S.dollars using the year-end exchange rates were approximately $15.5 million atDecember 31, 2004.  The potential reduction in fair value resulting from ahypothetical 10% adverse change in foreign currency exchange rates would havebeen approximately $1.6 million at December 31, 2004.  Any loss in fair value ofpermanently invested funds would be reflected in Other Comprehensive Income andwould not impact our net income. 

Our interest rate riskis attributable to borrowings under the line-of-credit and mortgage loan thatare tied to the bank's prime rate or short-term LIBOR rates.  We monitor ourexposure to floating interest rate risk on line-of-credit borrowings along withthe outstanding balance on the mortgage loan and may endeavor to mitigate thisrisk through the use of appropriate hedging instruments.

** **

**Item 4.  Controls and Procedures (as amended)**

**(a)     *Restatementof Previously Issued Financial Statements. ***As more fully describedin Note 14 of the notes to the Company's consolidated financial statements, wehave restated our consolidated financial statements for the three andnine-months ended September 30, 2005 and 2004.  As the result of therestatements of our previously issued financial statements, management hasreassessed the impact of the restatements on its disclosure controls andinternal controls over financial reporting for the interim periods in 2005.  Previouslyreported amounts for 2004 were not affected.

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**(b)     *Controlsand Procedures.*********We maintain disclosure controls and proceduresthat are designed to ensure that information required to be disclosed in thereports we file or submit with the Securities and Exchange Commission (the"Commission") is recorded, processed, summarized and reported within the timeperiods specified in the Commission's rules and forms, and that suchinformation is accumulated and communicated to management, including our principalexecutive officer and principal financial officer, as appropriate, to allowtimely decisions regarding required disclosure based on the definition of"disclosure controls and procedures" in Rule 13a-15(e) and 15d-15(e)promulgated under the Exchange Act.  In designing and evaluating the disclosurecontrols and procedures, management recognized that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, andmanagement is required to apply judgment in evaluating our controls andprocedures.  In connection with the original filing of our Quarterly Report onForm 10-Q for the quarter ended September 30, 2005, management, with theparticipation of the principal executive officer and principal financialofficer, conducted an evaluation of the effectiveness of our disclosurecontrols and procedures as of September 30, 2005 at the reasonable assurancelevel and concluded that our disclosure controls and procedures were effectiveas of September 30, 2005.  In light of the restatements referred to in(a) above, management, with the participation of our principal executiveofficer and principal financial officer, reevaluated our disclosure controlsand procedures as of September 30, 2005 at the reasonable assurance level. Based on this reevaluation and following the identification of the followingmaterial weakness in our internal control over financial reporting, managementconcluded that our disclosure controls and procedures were not effective as of September30, 2005:

As a resultof the error described above in Note 14 of the Notes to Consolidated FinancialStatements, the Company determined, and the Audit Committee concurred, that amaterial weakness existed with respect to its determination of the completenessand accuracy and monitoring of foreign exchange transaction gains/lossesrelated to certain intercompany balances.  This determination was disclosed ina Current Report on Form 8-K filed March 6, 2006.  This control deficiencyresulted in the restatement of the Company's condensed consolidated financialstatements for the fiscal quarters ending March 31, 2005, June 30, 2005 andSeptember 30, 2005 and the Company has filed a Form 10−Q/A for each ofthose fiscal quarters.  Accordingly, the Audit Committee has agreed withmanagement's assessment that its disclosure controls and procedures were noteffective and this control deficiency constituted a material weakness in itsinternal control over financial reporting as of December 31, 2005.  A materialweakness is a control deficiency or combination of control deficiencies thatresults in more than a remote likelihood that a material misstatement of theannual or interim financial statements will not be prevented or detected.

As a resultof this determination that the controls in place over the process oftranslating certain intercompany balances did not operate effectively as of and during the year ended December 31, 2005, the Company and its independentregistered accountants have performed additional procedures during the fourthquarter of 2005 closing process to address the control failure that occurred,including: a) performing additional recalculations of foreign exchangetransaction gains/losses on the intercompany balances and ending othercomprehensive income balance; b) reconfirmation of intercompany settlementsrelated to these balances; and c) rectified the errors within the consolidatingspreadsheet application.  The Audit Committee believes that these correctiveactions, taken as a whole, will successfully mitigate the material weaknessdescribed above and the Company will continue to perform these enhancedprocedures as part of their normal closing process.  

As a resultof these remedial actions (restatement of reported results and implementationof additional controls), the Chief Executive Officer and Chief FinancialOfficer are filing new certifications as of the date of this Quarterly Reporton Form 10-Q/A pursuant to Section 302 an Section 906 of the Sarbanes-Oxley Actof 2002 and the requirements of Rule 12b-15 under the Securities Exchange Actof 1934.

During the quarterlyperiod covered by this report and except as disclosed in this Item 4, therewere no changes in the Company's internal control over financial reporting thathave materially affected, or are reasonably likely to materially affect, theCompany's internal control over financial reporting.

** **

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** **

**PART II**

**OTHER INFORMATION**

Item1.     Legal Proceedings

          OnSeptember 30, 2005, the motion to dismiss the class action lawsuit against theCompany, John P. McAlister and B. James Rubin was denied, however, the motionto dismiss the plaintiff's claim against Ernst & Young LLP was granted. See "Contingent Liabilities" in the Notes to Unaudited FinancialStatements above for a general description.  Reference is also made to the"Legal Proceedings" section of our Form 10-K for the year endingDecember 31, 2004 for a detailed description of legal proceedings.

          TheChairman of the Company's Board of Directors also received a letter datedOctober 21, 2005 from an attorney purporting to represent a shareholder of theCompany, which demands that the Company's Board commence a civil action againstthe Company's directors and officers for alleged breach of duty related to theCompany's previously announced restatement.

** **

Item 2.     Changes inSecurities and Use of Proceeds

          None

Item 3.     Defaultsupon Senior Securities

          None

Item 4.     Submissionof Matters to a Vote of Security Holders

         None

Item 5.     OtherInformation

          None

Item 6.     Exhibits 

          

31.1      Section 302Certification of the Chief Executive Officer*

31.1      Section 302Certification of the Chief Executive Officer**

31.2      Section 302Certification of the Chief Financial Officer*

31.2      Section 302Certification of the Chief Financial Officer**

32.1      WrittenStatement of Chief Executive Officer and Chief Financial Officer Pursuant toSection 906 of the Sarbanes-Oxley Act of 2002*

32.1      WrittenStatement of Chief Executive Officer and Chief Financial Officer Pursuant toSection 906 of the Sarbanes-Oxley Act of 2002**

* Previously filed

** Filed herewith

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**TRIPOS, INC.**

**SIGNATURES**

** **

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned hereunto dulyauthorized.

TRIPOS, INC.

| Date: | March 29, 2006 | /s/ John P. McAlister                 |
|-------|----------------|---------------------------------------|
|       |                | President and                         |
|       |                | Chief Executive Officer               |
|       |                |                                       |
| Date: | March 29, 2006 | /s/ B. James Rubin                    |
|       |                | Senior Vice President,                |
|       |                | Chief Financial Officer and Secretary |
|       |                |                                       |
| Date: | March 29, 2006 | /s/ John D. Yingling                  |
|       |                | Vice President,                       |
|       |                | Chief Accounting Officer and          |
|       |                | Assistant Secretary                   |

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