FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549



QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended September 30, 2002



Commission File Number 0-23666



TRIPOS, INC.

(Exact Name of Registrant 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, Missouri 63144

(Address of Principal Executive Offices and Zip Code)



(314) 647-1099

(Registrant's Telephone Number, Including Area Code)







Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days.

YesX     No

Number of shares outstanding of the issuer's Common Stock, par value $.01 per share, as of September 30, 2002:8,794,550 shares.







TABLE OF CONTENTS



|                                                                                                                | Page
|--------------------------------------------------------------------------------------------------------------- | ----
|PART I FINANCIAL INFORMATION,                                                                                   |     
|Item 1. Financial Statements (Unaudited)                                                                        |     
|Consolidated Balance Sheets at September 30, 2002 and December 31, 2001                                         | 3   
|Consolidated Statements of Operations for Three and Nine Months Ended September 30, 2002
and September 30, 2001 | 4   
|Consolidated Statements of Cash Flows for Nine Months Ended September 30, 2002
and September 30, 2001           | 5   
|Notes to Consolidated Financial Statements                                                                      | 6   
|                                                                                                                |     
|Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations                   | 10  
|Item 4. Controls and Procedures                                                                                 | 14  
|PART II OTHER INFORMATION                                                                                       | 15  
|                                                                                                                |     
|SIGNATURES                                                                                                      | 15  





PART I

FINANCIAL INFORMATION

Item 1. Financial Statements.

CONSOLIDATED BALANCE SHEETS



|(In thousands)                                        | Sept 30, 2002 | Dec 31,2001
|----------------------------------------------------- | ------------- | -----------
|ASSETS                                                | (Unaudited)   |            
|Current Assets:                                       |               |            
|Cash and cash equivalents                             | $ 4,228       | $ 6,987    
|Marketable Securities                                 | 5,985         | 12,838     
|Accounts receivable                                   | 16,967        | 21,116     
|Notes receivable from executives                      | 97            | 65         
|Inventory                                             | 5,123         | 3,967      
|Prepaid expenses                                      | 2,372         | 1,339      
|Total current assets                                  | 34,772        | 46,312     
|                                                      |               |            
|Notes Receivable-trade                                | 4,370         | 4,503      
|Notes receivable from executives                      | 61            | 114        
|Property and equipment, less accumulated depreciation | 16,248        | 13,312     
|Capitalized development costs, net                    | 1,170         | 295        
|Goodwill, net of amortization                         | 965           | 958        
|Investment in restricted stock                        | 799           | 1,441      
|Investments and other assets, net                     | 2,336         | 702        
|Total assets                                          | $ 60,721      | $ 67,637   
|                                                      |               |            
|LIABILITIES AND SHAREHOLDERS' EQUITY                 
|Current Liabilities:                                  |               |            
|Current portion of long-term debt and capital leases  | $  358        | $   683    
|Accounts payable                                      | 942           | 1,146      
|Accrued expenses                                      | 4,339         | 7,399      
|Deferred revenue                                      | 8,294         | 6,907      
|Deferred income taxes                                 | 1,169         | 2,568      
|Total current liabilities                             | 15,102        | 18,703     
|                                                      |               |            
|Long-term portion of capital leases                   | 252           | 328        
|Long-term debt                                        | 2,615         | 2,739      
|Long-term deferred revenue                            | 2,982         | 2,977      
|Deferred income taxes                                 | 158           | 1,343      
|Series B preferred stock                              | --            | 9,826      
|                                                      |               |            
|Shareholders' equity :                                |               |            
|Common stock                                          | 44            | 38         
|Additional paid-in capital                            | 34,876        | 23,130     
|Retained earnings                                     | 1,450         | 1,958      
|Other comprehensive income                            | 3,242         | 6,595      
|Total shareholders' equity                            | 39,612        | 31,721     
|                                                      |               |            
|Total liabilities and shareholders' equity            | $ 60,721      | $ 67,637   
|                                                      |               |            

See accompanying notes.

Item 1. Financial Statements (continued)



CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

|                                                          | Three Months Ended |            | Nine Months Ended
|--------------------------------------------------------- | ------------------ | ---------- | -----------------
|                                                          | 09-30-2002         | 09-30-2001 |                  
|Net sales:                                                |                    |            |                  
|Discovery software                                        | $ 3,115            | $ 4,504    |                  
|Support                                                   | 1,992              | 1,958      |                  
|Software consulting services                              | 361                | 2,087      |                  
|Discovery research                                        | 5,290              | 2,683      |                  
|Hardware                                                  | 367                | 717        |                  
|Total net sales                                           | 11,125             | 11,949     |                  
|                                                          |                    |            |                  
|Cost of sales                                             | 4,084              | 3,166      |                  
|Gross margin                                              | 7,041              | 8,783      |                  
|                                                          |                    |            |                  
|Operating expenses:                                       |                    |            |                  
|Sales and marketing                                       | 3,910              | 3,175      |                  
|Research and development                                  | 2,966              | 2,671      |                  
|General and administrative                                | 1,783              | 1,861      |                  
|Total operating expenses                                  | 8,659              | 7,707      |                  
|                                                          |                    |            |                  
|Income (loss) from operations                             | (1,618)            | 1,076      |                  
|                                                          |                    |            |                  
|Other income, net                                         | 633                | (33)       |                  
|Income (loss) before income taxes
and preferred dividends | (985)              | 1,043      |                  
|                                                          |                    |            |                  
|Income tax expense (benefit)                              | (207)              | 87         |                  
|Net income (loss)                                         | (778)              | 956        |                  
|                                                          |                    |            |                  
|Preferred dividends                                       | --                 | 114        |                  
|Net income (loss) allocable to common shareholders        | $(778)             | $ 842      |                  
|                                                          |                    |            |                  
|Basic income (loss) per share                             | $ (0.09)           | $0.11      |                  
|Basic weighted average number of shares                   | 8,772              | 7,455      |                  
|Diluted income (loss) per share                           | $ (0.09)           | $0.10      |                  
|Diluted weighted average number of shares                 | 8,772              | 8,714      |                  
|                                                          |                    |            |                  

Per share data reflects a 2-for-1 stock split effective on February 5, 2001 for holders of record on January 12, 2001.

See accompanying notes.



Item 1. Financial Statements (continued)

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

|                                                                                         | Nine Months Ended
|---------------------------------------------------------------------------------------- | -----------------
|                                                                                         | 09-30-2002       
|Operating activities:                                                                    |                  
|Net income (loss)                                                                        | $ (471)          
|Adjustments to reconcile net income (loss) to
net cash provided by operating activities: |                  
|Depreciation of property and equipment                                                   | 1,160            
|Amortization of capitalized development costs and goodwill                               | 553              
|Gain from sale of equity investment                                                      | (2,409)          
|                                                                                         |                  
|Change in operating assets and liabilities:                                              |                  
|Accounts receivable                                                                      | 7,506            
|Notes receivable-trade                                                                   | 195              
|Inventories                                                                              | (784)            
|Prepaid expenses and other current assets                                                | (999)            
|Accounts payable and accrued expenses                                                    | (6,093)          
|Deferred revenue                                                                         | 876              
|Net cash provided by operating activities                                                | (466)            
|                                                                                         |                  
|Investing activities:                                                                    |                  
|Purchases of property and equipment                                                      | (3,456)          
|Capitalized development costs                                                            | (1,131)          
|Proceeds from sale of equity investment                                                  | 3,051            
|Acquisition, including investment in unconsolidated affiliates                           | (963)            
|Net cash provided by (used) in investing activities                                      | (2,499)          
|                                                                                         |                  
|Financing activities:                                                                    |                  
|Stock issuance pursuant to stock plans                                                   | 1,782            
|Dividends paid on Series B preferred stock                                               | (892)            
|Payments on long-term debt and capital leases                                            | (1,035)          
|Net cash provided by financing activities                                                | (145)            
|                                                                                         |                  
|Effect of foreign exchange rate changes on
cash and cash equivalents                     | 351              
|                                                                                         |                  
|Net increase in cash and cash equivalents                                                | (2,759)          
|                                                                                         |                  
|Cash and cash equivalents at beginning of period                                         | 6,987            
|Cash and cash equivalents at end of period                                               | $ 4,228          

See accompanying notes.

Item 1. Financial Statements (continued)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)



(1)     Summary of significant accounting policies

Organization

Our Discovery Software, Enterprise Software Consulting Service solutions and Discovery Research products and services enable life science companies to enhance their drug discovery capabilities. We combine our resources in computer-aided molecular design, cheminformatics, chemistry research and production, with the hands-on understanding of the challenges facing pharmaceutical research scientists in an effort to deliver products and services internationally recognized for their innovation and quality. By formulating new chemical compounds or aiding our partners' design of new chemical compounds that are more likely to result in drug discoveries, we offer our customers advantages in terms of research cycle time, cost, and efficiency of research and development activities.

Tripos was formed in 1979 to commercialize software for molecular visualization, analysis, and design. Since the formation of Tripos, we have increased our capabilities to include discovery services and enterprise consulting capabilities. Our goal is to integrate all of these offerings to achieve financial growth with a focus toward profitability and cash flows. Our business model is based on deriving recurring revenues from our discovery software, enterprise software consulting services, and discovery research business, as well as on achieving long-term contributions from therapeutic collaborations if and when new therapeutics are developed. The following is a brief description of each area of our business:

- Discovery Software. Our SYBYL® and UNITY® software suites are the core of our discovery software offerings. These suites offer integrated tools for computer-aided molecular modeling and visualization, visual screening, combinatorial library design, data storage and analysis, and structure-activity relationships to customers in pharmaceutical, agrochemical, biotechnology and related areas of research. We offer more than fifty (50) software products for these research areas.
- Software Consulting Services (Enterprise Informatics). Through our software consulting services, we design and build enterprise-wide systems that enable management and analysis of the vast amounts of data generated by high-throughput technologies in genomics, proteomics, chemistry, and biology. Our proprietary MetaLayerä"middleware" software integrates chemistry and biology data of disparate types and sources that cannot be effectively managed on our customer's existing information technology platforms.
- Discovery Research. Our Tripos Receptor Research laboratories, based in the United Kingdom, offer compound design and synthesis, molecular analysis and a complete suite of lead discovery and lead optimization capabilities. We also collaborate with our partners in strategic chemistry research projects that may include therapeutic collaborations. These collaboration projects are focused on specific therapeutic targets in which we obtain an ownership or economic interest in the products resulting from our research.

We have a geographically diverse customer base, with the majority of our revenues derived from European and Pacific Rim customers. Our worldwide sales force operates from offices throughout the United States, in England, France and Germany, and through representatives in Latin America and the Pacific Rim. Our headquarters are in St. Louis, Missouri and our chemistry laboratories are in Cornwall, England.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and 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 required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all normal recurring adjustments necessary for a fair presentation of such financial statements have been included. Operating results

Item 1. Financial Statements (continued)

for the three-month and nine-month periods ended September 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002.

(2)     Income Taxes

The provision for income taxes is computed using the liability method. The primary difference between financial statement and taxable income results from the use of different methods of computing capitalized development costs, accrued expenses and the valuation of net operating loss carryforwards.

(3)     Comprehensive Income

The components of comprehensive income, net of related tax, for the three- and nine-month periods ended September 30, 2002 and 2001 are as follows:

|                                                        | Three-month Period |            | Nine-month Period
|------------------------------------------------------- | ------------------ | ---------- | -----------------
|                                                        | 09-30-2002         | 09-30-2001 |                  
|Net income (loss)                                       | $ (778)            | $ 956      |                  
|Unrealized gain (loss) on marketable securities         | (1,392)            | (12,926)   |                  
|Less: reclassification for gains included in net income | (468)              | --         |                  
|Foreign currency translation adjustments                | 108                | 355        |                  
|Comprehensive (loss) income                             | $ (2,530)          | $ (11,615) |                  

The components of accumulated other comprehensive income, net of related tax, at September 30, 2002 and December 31, 2001 are as follows:

|                                         | 09-30-2002 | 12-31-2001
|---------------------------------------- | ---------- | ----------
|Foreign currency translation adjustments | $ 638      | $ (279)   
|Unrealized gain on marketable securities | 2,604      | 6,874     
|Accumulated other comprehensive income   | $3,242     | $ 6,595   

(4)     Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share for the quarters and year-to-date periods ended September 30, 2002 and 2001.

|                                                                                                      | Three-month Period |            | Nine-month Period
|----------------------------------------------------------------------------------------------------- | ------------------ | ---------- | -----------------
|                                                                                                      | 09-30-2002         | 09-30-2001 |                  
|Numerator:                                                                                            |                    |            |                  
|Numerator for basic earnings per share--
net income (loss) allocable to common shareholders           | $ (778)            | $ 842      |                  
|Add back preferred dividends     (Note A)                                                             | --                 | --         |                  
|Numerator for diluted earnings per share--
net income (loss)                                          | $ (778)            | $ 842      |                  
|                                                                                                      |                    |            |                  
|Denominator:                                                                                          |                    |            |                  
|Denominator for basic earnings per share--
weighted average shares                                    | 8,772              | 7,455      |                  
|Effect of dilutive securities:                                                                        |                    |            |                  
|Employee stock options (Note B)                                                                       | --                 | 1,259      |                  
|Preferred shares     (Note A)                                                                         | --                 | --         |                  
|Denominator for diluted earnings per share--
adjusted weighted average shares
and assumed conversions | 8,772              | 8,714      |                  
|Basic income (loss) per share                                                                         | $(0.09)            | $0.11      |                  
|Diluted income (loss) per share                                                                       | $(0.09)            | $0.10      |                  



Item 1. Financial Statements (continued)

Note A: For the nine-month period in 2002 and the three-month period in 2001, weighted average shares outstanding were not adjusted for the conversion of the Series B Preferred Stock as their inclusion would have been anti-dilutive. Accordingly, the related preferred dividends were not added back to the numerator for diluted earnings per share.

Note B: For the three- and nine-month period ended September 30, 2002, weighted average shares outstanding did not include the effect of employee stock options as their inclusion would have been anti-dilutive.

For additional disclosures regarding earnings per share, refer to the notes to the Company's 2001 consolidated financial statements in its Form 10-K.

(5)     Inventory

Tripos maintains a physical inventory of chemical compound libraries in various states of completion. Costs associated with the manufacture of compounds are calculated using average costs and are carried at the lower of cost or market. Compounds that are acquired from third parties are also carried at the lower of cost or market. Finished Goods inventory may periodically contain costs of computer hardware that has been acquired for resale to the Company's customers.

|                         | 09-30- 2002 | 12-31-2001
|------------------------ | ----------- | ----------
|Raw materials            | $  498      | $  209    
|Work in process          | 1,158       | 547       
|Finished goods           | 5,038       | 4,434     
|Reserve for obsolescence | (1,571)     | (1,223)   
|Total inventory          | $5,123      | $3,967    



(6)     Series B Preferred Stock

On January 29, 2002, the holder of the Series B Preferred Stock, LION Bioscience, voluntarily converted the shares into common stock and was paid the accrued dividend in cash. On February 7, 2002, LION sold all of these shares in a block trade with the assistance of a broker.

As of December 31, 2001 the value of Preferred shares outstanding was $9,826, of which $856 was accrued dividends.



(7)     Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board issued Statement No. 141, "Business Combinations" ("FAS 141") and FAS 142. FAS 141 became effective on July 1, 2001 and requires that all future business combinations be accounted for under the "purchase method". FAS 142 became effective on January 1, 2002 and effecting the valuation of goodwill and other intangible assets. These intangibles, with indefinite lives, are no longer amortized, but rather are assessed for impairment on a periodic basis. Accordingly, as of January 1, 2002, we no longer amortize goodwill and have performed a transitional impairment test of our existing goodwill as of June 30, 2002. We will now perform impairment tests annually. No impairment of goodwill was found in the initial transitional impairment test. The adoption of the non-amortization provisions of FAS 142 did not have a material effect on earnings or financial position.

In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"("FAS 144"),which addressed financial accounting and reporting for the impairment or disposal of long-lived assets and superceded SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations"for a disposal of a segment of a business. FAS 144 became effective for fiscal years beginning after December 15, 2001. We adopted FAS 144 as of January 1, 2002 and the adoption of the statement has not had a material effect on our financial position and results of operations.



Item 1. Financial Statements (continued)

(8)     Revenue Recognition

We recognize revenue from software licenses in accordance with Statement of Position 97-2 ("SOP 97-2"), "Software Revenue Recognition" and its update, SOP 98-4, upon product delivery, customer acceptance with all obligations fulfilled at the date of delivery, and determination that collectibility of the sale proceeds is probable. We recognize revenue from software support contracts ratably over the term of the contract, typically one to three years. In software arrangements that include rights to multiple software products, specified upgrades, software support services and/or other services, we allocate the total arrangement fee among each deliverable based on the relative fair value of each of the deliverables determined by vendor-specific objective evidence. Revenue from chemical compound sales is recognized upon delivery of the product. Hardware sales are recognized on delivery of the product from our vendor to the customer.

Our service-based activities in discovery research, collaborative software development and software consulting include projects such as defining new software products, informatics solutions and custom compound library design. We recognize revenue related to discovery research, collaborative software development projects and software consulting agreements as contractual milestones are achieved and delivered or, absent such contractual milestones, either on a completed contract basis or a percentage of completion basis depending upon the specific terms of each contract. The costs of providing the services for discovery research and software consulting services revenues are included in Cost of Sales for the periods in which the services are performed and revenue is recognized. We include costs to fulfill collaborative software development agreements in R&D to reflect the uncertain outcome from this type of research. A summary of the revenues and associated costs for collaborative software development for the three- and nine-month periods of 2002 and 2001 is shown below:

|                                            | Three-month Period |            | Nine-month Period
|------------------------------------------- | ------------------ | ---------- | -----------------
|Contract R&D Revenues and Costs             | 09-30-2002         | 09-30-2001 |                  
|Collaborative software development services | $1,091             | $460       |                  
|                                            |                    |            |                  
|Research & development costs                | $576               | $236       |                  

(9)     Significant Customers

During the third quarter of 2002, revenues from Pfizer, Inc. represented 43% of total net sales.For the same period in 2001, Pfizer represented less than 1% of total net sales. In the first quarter of 2002 we announced three separate contracts with Pfizer for multi-year worldwide licenses to our discovery software products, for a multi-year collaborative software development project around our LithiumTM technology and a $100 million four-year discovery research services project to design and synthesize exclusive compound libraries. In addition, we continue to perform collaborative software development with Pfizer for new products in the high throughput screening area. Nevertheless, the termination of one or more of these contracts or reduced requirements under certain of these contracts could have a material adverse effect on our revenues and profitability.

In the thirdquarter of 2001 revenues from the sale of Software Consulting products and services to Bayer AG represented 15% of Tripos' net sales. For the thirdquarter of 2002, Bayer represented less than 1% of total net revenues.

(10)     Software Capitalization

We capitalize software development costs under two conditions. First, software developed for the purpose of marketing to third parties is capitalized in accordance with Statement of Financial Accounting Standard No. 86 ("SFAS 86"), Accounting for the Costs of Software to be Sold, Leased, or Otherwise Marketed. As a result, we have capitalized costs associated with the commercialization of our ChemCore laboratory information system. For software developed for internal use, we apply SOP 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. Included in internal software is our own laboratory informatics system.



Item 1. Financial Statements (continued)

(11)     Related Party Transaction

During 2001, we made a 30-month loan to a senior vice president in the amount of $175. As of September 30, 2002, $158 remained outstanding of which $35 (including accrued interest) was past due. We are taking actions to collect amounts that are currently in default. The loan is further described in our proxy statement for the 2002 Annual Meeting of Shareholders.



(12)     Debt Facilities

We have existing credit facilities provided by LaSalle Bank in the form of a revolving line of credit and a mortgage loan for our corporate headquarters building. As of September 30, 2002 there were no borrowings outstanding on the line of credit and a balance of $2,780 remaining on the mortgage. Our bank has waived our non-compliance with covenants as of September 30, 2002 concerning maximum capital expenditures and minimum cash flows (i.e. EBITDA) under our current credit facility.

Our bank has issued a commitment letter for a new credit facility that would replace the existing facility that matures in April 2003, make certain additional borrowings available, and revise certain covenants from those in effect in the current facility. We are currently negotiating definitive terms.

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

(In thousands, except per share data)

Forward-looking Statements

This report may contain certain statements that are forward-looking and involve risks and uncertainties. Words such as "expects", "anticipates", "projects", "estimates", "intends", "plans", "believes", variations of such words and similar expressions are intended to identify such forward looking statements. These statements are based on current expectations and projections made by management and are not guarantees of future performance. Therefore, actual events, outcomes and results may differ materially from what is expressed or forecast in such forward-looking statements. We have identified certain factors that could cause actual results to differ materially from the forward-looking statements under the caption "Cautionary Statements -- Additional Important Factors to be Considered" in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") in Tripos' Form 10-K for 2001. Except as required under federal securities laws and the rules and regulations of the SEC, we do not have any intention or obligation to update or revise any forward-looking statements in this Form 10-Q, whether as a result of new information, future events, changes in assumptions or otherwise.

The following discussion should be read in conjunction with the audited consolidated financial statements and notes thereto.

Overview

As a leader in our industry, we provide the pharmaceutical, biotechnology, agrochemical and other life sciences industries with state-of-the-art discovery chemistry, integrated discovery software products, software consulting services, and discovery research. We combine information technology and scientific research to optimize and accelerate molecular research for the discovery and progression of new products by our customers. Our products include proprietary discovery software tools to manage, analyze and share biological and chemical information; systems integration along with other software consulting services; diverse chemical libraries; and collaborative and contract research for the discovery, synthesis, characterization and optimization of new chemical compounds that are active in biological systems.

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

(Continued)

We license software and support in the form of one to three-year renewable contracts for any of our more than 50 software modules available for sale. The magnitude of these license fees is dependent on each customer's required usage levels, that is, the number of locations and individual users. Variations in licensing levels range from the low hundred-thousands up to several million dollars and therefore may be sufficient to impact the comparability of quarterly results.

Our integration of chemistry and biological data in the life sciences industries creates a revenue stream for enterprise software consulting services. To serve this market, we maintain a staff of specialists who use our proprietary data integration framework, MetaLayerTMsoftware, to configure customized solutions for data management. Revenue, depending on the contract, may be generated on a billable rate per day, or upon achievement of milestones or deliverables, and is recognized as services are performed. These contracts may also generate substantial license fee revenue for our proprietary software technologies such as our MetaLayerTM and ChemCoreTMsoftware. As with our discovery software products, licensing levels may range from the low hundred-thousands up to several million dollars and therefore may be sufficient to impact the comparability of quarterly results.

We develop and manufacture general screening compound libraries for sale to the life sciences industry. Revenue from the sale of these compound libraries is recognized upon shipment to the customer. Individual contracts for the sale of compound libraries may vary greatly in magnitude, from a few hundred dollars to over one million dollars, and thus may affect the comparability of quarterly results. The sale of compound libraries has created the opportunity to offer follow-up discovery research services to customers for design and synthesis of focused libraries for lead optimization. We also market a comprehensive research process to our life sciences customers for rapid and cost effective discovery. This process combines advanced informatics, chemistry and biology products and services, and proprietary discovery technologies for efficient lead development, refinement, and optimization resulting in a tightly integrated process to facilitate synergies in drug discovery. Revenue from these optimization or LeadFocus library design and synthesis contracts may include: technology access fees, billable time (full-time equivalents), milestone payments and royalties.

We also act as a reseller of computer hardware in conjunction with software sales. Hardware sales are generally made to facilitate integration of our software into customer research activities and are not a focus of our sales activities. We act merely as an authorized reseller and do not maintain any inventory. Accordingly, margins on these sales are relatively modest and are typically below 10%.

Over time we have invested in collaborative internal drug discovery programs with Arena Pharmaceuticals, Arrow Pharmaceuticals and Signase, Inc. These collaborations have generated patented lead compounds that are actively being validated and pursued by our respective partners. We are unable to predict when and if we will recognize any financial benefit from these collaborations. The costs of these program investments have been expensed in prior years.

We license discovery software tools to customers, provide ongoing support, including upgrades selected by customers, and provide consulting services to customers that enable the integration of our discovery tools to customers' discovery operations. We generally expense research and development costs associated with software enhancements and new software tools. Thus, a significant portion of the costs associated with development and enhancement of software is accounted for as research and development and not as a cost of software sales.

Quarterly expenses include the fixed costs of research and development for software development and new chemistry research along with related overheads. We believe that selling and marketing expenses will be higher in 2002 as a percent to net sales as we grow this organization to capitalize on market opportunities. We expect that 2002 administrative costs will be consistent with 2001 levels, however, these expenses may rise in future periods as our company grows. Variability in quarterly expenses primarily occurs in relation to the level of revenues for sales compensation, bonuses and for periodic marketing activities such as appearances at trade exhibitions.



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

(Continued)

Our revenues and expenses vary from quarter to quarter depending upon, among other things, the timing of customers' budget processes, the success of our sales efforts, the lengthy sales cycle and our ability to influence customers and prospective customers to make decisions to outsource portions of their discovery process, the size of the customers' capital expenditure budgets, the ability to produce compound libraries in a timely manner, market acceptance of new products and enhanced versions of existing products, the timing of new product introductions by us and other vendors, changes in pricing policies (ours, partners and other vendors), consolidation in customer base, client involvement in decision points in contracts related to project plans, and changes in general economic and competitive conditions. In addition, we may negotiate a long-term software license contract that may, subject to certain rules of SOP 97-2 and SOP 98-4, be required to be recognized ratably over the life of the contract. See Note 8 of the Notes to Unaudited Consolidated Financial Statements of this Form 10-Q for a further discussion of revenue recognition policies. A substantial portion of product-based revenues for each quarter is attributable to a limited number of orders and tends to be realized toward the end of each quarter. The mix of revenue components can also affect our quarterly results. Variability in the timing, scope, and magnitude of milestone and other service-based payments under existing and future contracts along with our ability to obtain additional contracts can have a significant impact on quarterly and annual revenues.

Results of Operations

Net sales for the third quarter of 2002 were $11,125 compared to $11,949 in 2001. Net sales for the nine-months year-to-date increased 7% and were $34,887 and $32,463 for 2002 and 2001, respectively.

For the three months ended September 30, 2002, discovery software and support revenues ($5,107) were down 21% from the prior year period ($6,462); however, year-to-date these revenues grew by 18% to $19,027 in 2002 from $16,172 in 2001. Included in our discovery software revenues are collaborative software development projects that increased by 137% to $1,091 in the third quarter of 2002 compared to the same period in 2001. For the nine-month period of 2002, collaborative software development grew by 68% to $2,570 compared to 2001. Progress on our discovery software research collaborations generally remain consistent with contractual requirements for the development and deployment of our LithiumÔand high throughput screening technologies. Software consulting services revenues accounted for $361 in the three-month period ending September 30, 2002 compared to $2,087 for the same period in 2001. Nine-month year-to-date revenues for SCS were $2,604 and $8,142 for 2002 and 2001, respectively. The 83% decline for the quarter and 68% decline for the year-to-date periods are attributable to a modest level of revenue recognition for successfully completed work and lack of additional new contracts. Tripos also experienced unanticipated delays and missed a milestone in the deployment of one complex system during the second quarter of 2002 that has negatively impacted gross margin and continued to impede revenue recognition in the third quarter for that project. Discovery research sales, including LeadQuestÔcompound libraries, accounted for $5,290 in the third quarter of 2002 compared to $2,683 in the same period in 2001, an increase of 97%. Discovery research revenues for the nine-month periods in 2002 and 2001 were $12,502 and $5,598, respectively, an increase of 123%. This increase in Discovery research business was attributed to work on the $100 million strategic compound design and synthesis contract with Pfizer (announced in January 2002), along with discovery research work for other customers. Low margin hardware sales decreased by 49% from $717 in 2001 to $367 for the third quarter 2002 and by 70% from $2,551 for the nine-month period in 2001 to $754 for the year-to-date period in 2002.

Net sales for the Company's activities outside of North America represented approximately 72% for the three months ended September 30, 2002 and 62% for the first nine months of the year compared to 39% and 49%, respectively for the same period in 2001. Net sales in Europe increased 88% for the third quarter of 2002 compared to 2001 and accounted for 66% and 33% of net sales for the three-month periods, respectively. The increase in Europe for 2002 is principally related to the on-track performance to-date in the chemistry collaboration with Pfizer's European research location. Net sales in the Pacific Rim, principally Japan, decreased 15% compared to the third quarter of 2001 and accounted for 6% of net sales for the periods. Sales to existing customers represent 92% of total net sales for the nine-month period ending September 30, 2002.

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

(Continued)

Cost of sales for the nine-month period ending September 30, 2002 increased 36% to $11,849 compared to the same period in 2001. Cost of sales were $4,084 and $3,166 for the third quarter of 2002 and 2001, respectively, an increase of 29%. Higher discovery research and compound revenues, traditionally lower margin services, resulted in an increase in costs of sales. Cost of sales as a percent of total net sales was 37% and 26% for the three-month periods and 34% and 27% for the nine-month periods in 2002 and 2001, respectively.

Gross profit margin percentage for the third quarter 2002 decreased to 63% from 74% of total net sales in the third quarter of 2001. For the nine months year-to-date, gross margin percentage decreased to 66% in 2002 from 73% in 2001. The decrease in gross profit resulted from a shift in the mix of revenues from our product and service offerings.

Sales and marketing expenses increased 23% to $3,910 from $3,175 for the third quarter of 2002 compared to 2001 and by 46% to $12,281 from $8,413 for the nine-months year-to-date compared to 2001. Sales and marketing expenses as a percentage of net sales were 35% and 27% for the third quarter in 2002 and 2001, respectively. The increase in sales and marketing expenses is driven by additions to the sales and marketing organization and the amortization related to our contribution to the five-year joint marketing effort with Accenture to offer combined expertise in enterprise consulting and knowledge management services. Additionally, product advertisement increased over the prior year in an effort to increase public awareness and inform current and potential customers of Tripos products.

Research and development expenses increased to $2,966 from $2,671 and represented 27% and 22% of net sales for the third three-month periods in 2002 and 2001, respectively. Nine month year-to-date R&D expenses were $9,261 in 2002 compared to $7,577 in 2001, 27% and 23% of net sales, respectively. The increases in expense dollars and percentage of net sales reflect preparation and startup costs for the previously announced strategic design and synthesis discovery research project with Pfizer along with collaborative software development agreements whose costs are included in R&D reflecting the uncertain outcome from this type of research.

General and administrative expenses decreased 4% for the third quarter of 2002 to $1,783 from $1,861 in 2001, and represent 16% of net sales. For the nine-month period ending September 30, 2002, G&A expense was $4,952 compared to $4,841 in 2001, a 2% increase. The increase in G&A for the year-to-date period is principally related to miscellaneous corporate matters.

Other income increased from a net loss of $33 for the third quarter in 2001 to net income of $633 for the comparable period in 2002. During the nine-month periods in 2001 we realized a net gain of $2,387 on the sale of one hundred thousand shares of Arena Pharmaceuticals at $27 per share during Arena's secondary public offering. During the third quarter of 2002, we continued selling shares of Arena under a program initiated earlier in 2002 and realized gains from the sale of one hundred thirty thousand shares at an average price of $6.30 per share.For the nine-month period in 2002, we sold an aggregate of three hundred eighty thousand shares of Arena at an average price of approximately $8 per share, resulting in a gain of $2,400.

Income tax benefit was $207 for the third three-month period in 2002, which represents an effective tax rate of 21%. For the same period in 2001, income tax expense was $87, resulting in a 30% year-to-date effective rate. The rate reduction for 2002 reflects management's estimated usage of net operating losses in the U.K. during the current tax year ending December 31, 2002.

Liquidity, Capital Resources and Capital Commitments

During 1998 and 1999, we used our capital resources to fund investments in the building of chemistry production facilities, chemical compound library inventories, collaborative drug discovery programs, staffing new business opportunities, and investments in Arena Pharmaceuticals. In fiscal year 2000, we used cash available from an equity investment by LION to make capital investments, reduce debt levels and conduct operations. In 2001, we benefited from those prior investments that had begun to generate positive cash flows. In April 2002, we announced our intentions to expand our chemistry research facility in England. Weestimate the total investment in new laboratories to be up to $24 million with grant funding of up to $5.3 million coming from the British central and regional governments. We plan to fund this project from working capital, cash flow from operations, proceeds from possible further sales of Arena

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

(Continued)

Pharmaceuticals common stock, our bank facilities and, if necessary, equipment lease financing that we expect to be available for these purposes.

For the nine-month period ending September 30, 2002, net cash used in operations was $466 primarily due to a net loss of $471, decreases in trade accounts receivable of $7,506, a decrease in notes receivable of $195, an increase in deferred revenue of $876 and depreciation and amortization of $1,160 and $553 respectively, which were offset by a decrease in accounts payable and accrued expenses of $6,093, an increase in prepaid expenses of $999 less the gain from the sale of shares of Arena, $2,409. For the nine-month period ending September 30, 2001, net cash provided by operations was $1,325 primarily due to net income of $3,971, a decrease in trade accounts receivable of $293 and prepaid expenses of $295, an increase in accounts payable and accrued expenses of $2,596 along with depreciation and amortization of $1,166 and $165 respectively, which were offset by increases in inventories of $307, notes receivables of $1,733 and a decrease in deferred revenue of $2,396.

Cash used by investing activities during the first nine months of 2002 were for property and equipment acquisitions ($3,456), net investments in Signase, Inc. ($500), A.M. Pappas's TechAMP II life sciences fund ($463), capitalized development costs for our ChemCoreÔtechnology ($1,131) which were partially offset by the $3,051 of gross proceeds from the sale of Arena shares. For the first nine months of 2001, cash provided by investing activities related to gross proceeds from the sale of Arena shares $2,894 offset by capital expenditures of $1,207 and an investment in A.M. Pappas's TechAMP II life sciences fund of $525.

Cash provided by financing activities for 2002 included the payment of accrued dividends upon the conversion of the Series B Preferred Stock by LION Bioscience ($892) and the reduction of outstanding debt ($1,035) offset by proceeds from the exercise of employee stock options of $1,782. For the same nine-month period in 2001, the net cash provided by financing activities of $700 resulted from proceeds from stock option exercises reduced by debt repayments.

We anticipate that working capital of $19,670, at September 30, 2002, together with continued cash flow from operations, payments to be received under current and contemplated strategic partnership contracts, the U.K. grant assistance for our previously announced chemistry laboratory expansion, our bank facilities (when amended and expanded), and equipment lease financing, will be sufficient to fund our operations and commitments for at least the next twelve months. For a description of certain factors that could adversely affect the Company's future capital requirements and the adequacy of its available funds, including factors that are beyond the Company's control, see the discussion under the caption "Cautionary Statements-Additional Important Factors to be Considered" in the Company's Annual Report on Form 10-K for the year ended December 31, 2001.

Item 4. Controls and Procedures

Within 90 days prior to the date of this report, we carried out, under the supervision and with the participation of our management, including the Chief Executive Officer and the Chief Financial Officer, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information which is required to be included in the periodic reports that Tripos must file with the Securities and Exchange Commission.

There have been no significant changes in our internal controls or in other factors that could significantly affect the internal controls subsequent to the date we completed our evaluation.





PART II

OTHER INFORMATION

Item 1.     Legal Proceedings

The Company is not a party to any material litigation and is not aware of any threatened material litigation.

Item 2.     Changes in Securities

None

Item 3.     Defaults upon Senior Securities

None

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

None

Item 5.     Other Information

None

Item 6.     Exhibits and Reports on Form 8-K

(a) List of Exhibits

None

(b) No reports on Form 8-K were required to be filed during the period from July 1, 2002 to September 30, 2002.



TRIPOS, INC.

SIGNATURES

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

TRIPOS, INC.

|Date: | November 13, 2002 | /s/ John P. McAlister                
|----- | ----------------- | -------------------------------------
|      |                   | President and                        
|      |                   | Chief Executive Officer              
|      |                   |                                      
|Date: | November 13, 2002 | /s/ B. James Rubin                   
|      |                   | Senior Vice President,               
|      |                   | Chief Financial Officer and Secretary
|      |                   |                                      
|Date: | November 13, 2002 | /s/ John D. Yingling                 
|      |                   | Vice President,                      
|      |                   | Chief Accounting Officer and         
|      |                   | Assistant Secretary                  



Exhibit

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002



I, B. James Rubin, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Tripos, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other signing officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function); (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of their most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.



Date: November 13, 2002

/s/ B. James Rubin

B. James Rubin
	Chief Financial Officer





Exhibit

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002



I, John P. McAlister, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Tripos, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other signing officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function); (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of their most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.



Date: November 13, 2002

/s/ John P. McAlister

John P. McAlister

Chief Executive Officer