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, 2001



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 $.005 per share, as of September 30, 2001:7,473,525 shares.







TABLE OF CONTENTS



|                                                                                                              | Page
|------------------------------------------------------------------------------------------------------------- | ----
|PART I FINANCIAL INFORMATION,                                                                                 |     
|Item 1. Financial Statements (Unaudited)                                                                      |     
|Consolidated Balance Sheets at September 30, 2001 & December 31, 2000                                         | 3   
|Consolidated Statements of Operations for Three & Nine Months Ended September 30, 2001
and September 30, 2000 | 4   
|Consolidated Statements of Cash Flows for Nine Months Ended September 30, 2001
and September 30, 2000         | 5   
|Notes to Consolidated Financial Statements                                                                    | 6   
|                                                                                                              |     
|Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations                 | 9   
|                                                                                                              |     
|PART II OTHER INFORMATION                                                                                     | 12  
|                                                                                                              |     
|SIGNATURES                                                                                                    | 13  



PART I

FINANCIAL INFORMATION

Item 1. Financial Statements.

CONSOLIDATED BALANCE SHEETS



|(In thousands)                                         | 09-30-2001  | 12-31-2000
|------------------------------------------------------ | ----------- | ----------
|ASSETS                                                 | (Unaudited) |           
|Current Assets:                                        |             |           
|Cash and cash equivalents                              | $ 7,047     | $ 3,806   
|Marketable Securities                                  | 11,798      | 13,576    
|Accounts receivable                                    | 15,380      | 15,531    
|Inventory                                              | 4,604       | 4,345     
|Prepaid expenses                                       | 1,197       | 1,452     
|Total current assets                                   | 40,026      | 38,710    
|                                                       |             |           
|Notes Receivable-trade                                 | 3,744       | 2,063     
|Deferred income taxes                                  | 118         | 118       
|Property and equipment, less accumulated depreciation  | 12,637      | 12,826    
|Capitalized development costs, net                     | 233         | 327       
|Goodwill, net of amortization                          | 972         | 1,023     
|Investment in restricted stock & investment fund       | 2,020       | 1,931     
|Other, net                                             | 162         | 188       
|Total assets                                           | $59,912     | $57,186   
|                                                       |             |           
|LIABILITIES AND SHAREHOLDERS' EQUITY                  
|Current Liabilities:                                   |             |           
|Current portion of long-term debt and capital leases   | $   646     | $ 3,949   
|Accounts payable                                       | 1,624       | 1,423     
|Accrued expenses                                       | 5,523       | 3,240     
|Deferred revenue                                       | 5,618       | 8,679     
|Deferred income taxes                                  | 3,484       | 4,297     
|Total current liabilities                              | 16,895      | 21,588    
|                                                       |             |           
|Long-term portion of long-term debt and capital leases | 2,792       | 314       
|Long-term deferred revenue                             | 2,642       | 1,951     
|Long-term deferred income taxes                        | 250         | --        
|Series-B preferred stock                               | 9,713       | 9,376     
|                                                       |             |           
|Shareholders' equity :                                 |             |           
|Common stock                                           | 37          | 36        
|Additional paid-in capital                             | 21,503      | 20,023    
|Retained earnings (deficit)                            | 155         | (3,480)   
|Other comprehensive income                             | 5,925       | 7,378     
|Total shareholders' equity                             | 27,620      | 23,957    
|Total liabilities and shareholders' equity             | $59,912     | $57,186   
|                                                       |             |           

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
|--------------------------------------------------------- | ------------------ | ---------- | -----------------
|                                                          | 09-30-2001         | 09-30-2000 |                  
|Net sales:                                                |                    |            |                  
|Software licenses                                         | $4,504             | $2,123     |                  
|Support                                                   | 1,958              | 1,897      |                  
|Software consulting services                              | 2,087              | 70         |                  
|Discovery services                                        | 2,683              | 1,448      |                  
|Hardware                                                  | 717                | 164        |                  
|Total net sales                                           | 11,949             | 5,702      |                  
|                                                          |                    |            |                  
|Cost of sales                                             | 2,502              | 1,090      |                  
|Gross margin                                              | 9,447              | 4,612      |                  
|                                                          |                    |            |                  
|Operating expenses:                                       |                    |            |                  
|Sales and marketing                                       | 3,175              | 2,294      |                  
|Research and development                                  | 3,335              | 2,313      |                  
|General and administrative                                | 1,861              | 1,321      |                  
|Total operating expenses                                  | 8,371              | 5,928      |                  
|                                                          |                    |            |                  
|Income (loss) from operations                             | 1,076              | (1,316)    |                  
|Other income (loss), net                                  | (33)               | 245        |                  
|Income (loss) before income taxes and preferred dividends | 1,043              | (1,071)    |                  
|                                                          |                    |            |                  
|Income tax expense (benefit)                              | 87                 | --         |                  
|Net income (loss)                                         | 956                | (1,071)    |                  
|Preferred dividends                                       | 114                | 113        |                  
|Net income (loss) allocable to common shareholders        | $ 842              | $(1,184)   |                  
|                                                          |                    |            |                  
|Basic income (loss) per share                             | $0.11              | $(0.17)    |                  
|Basic weighted average number of shares                   | 7,455              | 7,049      |                  
|Diluted income (loss) per share                           | $0.10              | $(0.17)    |                  
|Diluted weighted average number of shares                 | 8,714              | 7,049      |                  

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
|---------------------------------------------------------------------------------------- | -----------------
|                                                                                         | 09-30-2001       
|Operating activities:                                                                    |                  
|Net income (loss)                                                                        | $ 3,971          
|Adjustments to reconcile net income (loss) to
net cash provided by operating activities: |                  
|Depreciation of property and equipment                                                   | 1,166            
|Amortization of capitalized development costs and goodwill                               | 165              
|Change in operating assets and liabilities:                                              |                  
|Accounts receivable                                                                      | 293              
|Notes receivable-trade                                                                   | (1,733)          
|Inventories                                                                              | (307)            
|Prepaid expenses and other current assets                                                | 295              
|Accounts payable and accrued expenses                                                    | 2,596            
|Deferred revenue                                                                         | (2,396)          
|Net cash provided by and (used in) operating activities                                  | 4,050            
|                                                                                         |                  
|Investing activities:                                                                    |                  
|Notes receivable-other                                                                   | --               
|Purchases of property and equipment                                                      | (1,207)          
|Capitalized development costs                                                            | --               
|Investment in restrictive stock & investment fund                                        | (532)            
|Net cash used in investing activities                                                    | (1,739)          
|                                                                                         |                  
|Financing activities:                                                                    |                  
|Stock issuance pursuant to stock plans                                                   | 1,481            
|Proceeds from issuance of Series B preferred stock                                       | --               
|Payments on long-term debt and capital leases                                            | (781)            
|Net cash provided by financing activities                                                | 700              
|                                                                                         |                  
|Effect of foreign exchange rate changes on cash and cash equivalents                     | 230              
|Net increase in cash and cash equivalents                                                | 3,241            
|                                                                                         |                  
|Cash and cash equivalents at beginning of period                                         | 3,806            
|Cash and cash equivalents at end of period                                               | $ 7,047          

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

Tripos, Inc. is a leading provider of discovery chemistry, integrated discovery software products, software consulting services, and discovery research services to the pharmaceutical, biotechnology, agrochemical, and other life sciences industries. We integrate information technology and scientific research to optimize and accelerate molecular research for the discovery of new products by our clients.

With a strong foundation in cheminformatics, Tripos provides its customers with what we believe are distinct competitive advantages. Our "chemically intelligent" discovery software tools are able to manage, analyze and share biological and chemical information. Tripos' software consulting services help to organize data in a manner that is conducive to discovery research. Tripos' proprietary chemical compound libraries couple our molecular design technology and synthesis capabilities. Discovery research services leverage Tripos' cheminformatics expertise in molecular design analysis and medicinal chemistry. Together, these services allow our customers to take advantage of recent advances in high throughput screening for biological activity with a goal of accelerating the development and commercialization of major new products.

Our customers, a number of which are industry leaders, use our products and services to reduce product discovery costs and time, and to accelerate the development of major new products. To date, Tripos has entered into strategic alliances with numerous pharmaceutical and biotechnology companies. Certain of these contracts provide for recurring payments for products and services over the course of the contract term and may well lead to milestone payments or royalty arrangements for new product discoveries. Tripos has a geographically diverse customer base, with approximately half of its revenues derived from European and other customers outside the United States. Tripos has a worldwide sales force with offices throughout the United States, in England, France and Germany, representatives throughout the Pacific Rim, and its Tripos Receptor Research chemistry laboratories in 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 for the three-month and nine-month periods ended September 30, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001.

(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. In the quarter ended September 30, 2001, the effective tax rate was reduced to 30% from 35% to reflect management's estimate of such rate for the fiscal year ending December 31, 2001 and includes the utilization of some loss carryforwards. The impact on net income for the three-months and nine-months ended September 30, 2001 was $241, or $.03 per diluted share, respectively.

(3)     Comprehensive Income

The components of comprehensive income, net of related tax, for the three- and nine-month periods ended September 30, 2001 and 2000 are as follows:

|                                                | Three-month Period |            | Nine-month Period
|----------------------------------------------- | ------------------ | ---------- | -----------------
|                                                | 09-30-2001         | 09-30-2000 |                  
|Net income (loss)                               | $ 956              | $ (1,071)  |                  
|Unrealized gain (loss) on marketable securities | (12,926)           | 16,905     |                  
|Foreign currency translation adjustments        | 355                | (281)      |                  
|Comprehensive income (loss)                     | $(11,615)          | $ 15,553   |                  



Item 1. Financial Statements (continued)

The components of accumulated other comprehensive income, net of related tax, at September 30, 2001 and December 31, 2000 are as follows:

|                                                | 09-30-2001 | 12-31-2000
|----------------------------------------------- | ---------- | ----------
|Foreign currency translation adjustments        | $(266)     | $(156)    
|Unrealized gain (loss) on marketable securities | 6,191      | 7,534     
|Accumulated other comprehensive income (loss)   | $5,925     | $7,378    

(4)     Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share for the quarters ended September 30, 2001 and 2000. The denominators for the quarters ended September 30, 2001 and 2000 reflect the 2-for-1 stock split effective on February 5, 2001.

|                                                                                                      | Three-month Period |            | Nine-month Period
|----------------------------------------------------------------------------------------------------- | ------------------ | ---------- | -----------------
|Numerator:                                                                                            | 09-30-2001         | 09-30-2000 |                  
|Numerator for basic earnings per share--net income (loss)
allocable to common shareholders            | $842               | $ (1,184)  |                  
|Add back preferred dividends     (Note A)                                                             | --                 | --         |                  
|Numerator for diluted earnings per share--net income (loss)                                           | 842                | $ (1,184)  |                  
|Denominator:                                                                                          |                    |            |                  
|Denominator for basic earnings per share--
weighted average shares                                    | 7,455              | 7,049      |                  
|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 | 8,714              | 7,049      |                  
|Basic income (loss) per share                                                                         | $0.11              | $(0.17)    |                  
|Diluted income (loss) per share                                                                       | $0.10              | $(0.17)    |                  

Note A: Weighted average shares outstanding for both the three- and nine-month periods ending September 30, 2000 and the three-month period ending September 30, 2001 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: Employee stock options to purchase shares of the Company's common stock were not included in the September 30, 2000 computations of diluted earnings per share because the effect would have been anti-dilutive.

For additional disclosures regarding earnings per share, see the notes to the Company's 2000 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.

|                         | 09-30-2001 | 12-31-2000
|------------------------ | ---------- | ----------
|Raw materials            | $ 233      | $  580    
|Work in process          | 848        | 348       
|Finished goods           | 4,702      | 4,323     
|Reserve for obsolescence | (1,179)    | (906)     
|Total inventory          | $4,604     | $4,345    



Item 1. Financial Statements (continued)

(6)     Long Term Debt

Tripos has a credit commitment from LaSalle Bank for a secured credit facility consisting of a real estate mortgage for our headquarters property and a $4,000 revolving line of credit. The credit commitment is collateralized by substantially all of Tripos' U.S. assets along with stock pledges of its U.S. subsidiary and one foreign subsidiary. The commitment also requires Tripos to meet certain financial covenants, including a coverage ratio and a minimum capitalization ratio. On June 29, 2001, Tripos and LaSalle completed an amendment to the credit facility that extended the maturities of the mortgage and revolving line of credit by one year to April 30, 2003.

The mortgage note under the current credit commitment calls for even quarterly principal payments based on a twenty-year amortization schedule that began June 30, 1999 (outstanding balance at September 30, 2001 was $2,947). Borrowings under the mortgage are subject to a variable interest rate at LIBOR plus 2.25%. An interest rate swap agreement was entered into that fixed the interest rate at 7.81% through April 30, 2002. A second swap was entered into that fixed the rate from May 1, 2002 to April 30, 2003 at 7.40%. The revolving line of credit under the credit commitment requires quarterly interest-only payments with any remaining borrowings due at the end of the three-year commitment period. Availability under the revolving line of credit is based on eligible U.S. accounts receivable. Borrowings under the revolving line of credit bear interest at variable rates tied to LIBOR or the bank's prime rate. At September 30, 2001, no borrowings were outstanding.

(7)     Series B Preferred Stock

On February 4, 2000, Tripos issued 409 shares of Series B Preferred Stock for an aggregate purchase price of $9,000. Cumulative dividends of $1.10 per share per annum are payable upon the earlier of the conversion or redemption of such share. Each share of preferred stock may be converted, at the option of the holder, into two shares of Tripos' common stock. The preferred stock is mandatory redeemable at the option of the holder at a price of $11 per share plus accreted dividends on February 4, 2005 provided that the holder has provided notice of its intention to have its shares redeemed on or prior to February 4, 2004. The change in Series B Preferred Stock for the periods ending September 30, 2001 and December 31, 2000 are as follows:

|                                     | 09-30-2001 | 12-31-2000
|------------------------------------ | ---------- | ----------
|Issuance of Series B Preferred Stock | $8,970     | $8,970    
|Dividend accretion                   | 743        | 406       
|Total Preferred Stock                | $9,713     | $9,376    



(8)     Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"), which was required to be adopted in years beginning after June 15, 1999. The FASB delayed the effective date until years beginning after June 15, 2000, with the issuance of FAS No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FAS No. 133". FAS 133 permitted early adoption as of the beginning of any fiscal quarter after its issuance. Tripos has adopted the new Statement effective January 1, 2001. FAS 133 requires us to recognize all derivatives on the balance sheet at fair value. Adoption of FAS 133 did not result in a material impact on earnings and financial position.

In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations ("FAS 141"), and No. 142, Goodwill and Other Intangible Assets ("FAS 142"), effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill will no longer be amortized but will be subject to annual impairment tests. Other intangible assets will continue to be amortized over their useful lives. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning with the first quarter of 2002. The effect of applying the non-amortization provisions of the Statement is expected to be immaterial based on existing intangible assets. During 2002, the Company will perform the first of the required impairment tests of goodwill as of January 1, 2002 and has not yet determined what the effect of these tests will be on the earnings and financial position of the Company.

(9)     Revenue Recognition

In late 1997, the Accounting Standards Executive Committee of the AICPA issued statement of Position 97-2 ("SOP 97-2"), "Software Revenue Recognition" and updated it in early 1998 with SOP 98-4. These SOPs became effective for us for transactions entered into after January 1, 1998. Tripos recognizes revenue from software licenses in accordance with these SOPs upon product delivery, customer acceptance with all obligations fulfilled at the date of delivery, and determination that collectibility of the sale proceeds is probable. Tripos recognizes revenue from software support

Item 1. Financial Statements (continued)

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 based on 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.

Tripos has entered into discovery research agreements for custom compound library design and synthesis as well as software consulting services arrangements to provide data integration, chemistry research process organization and other custom informatics solutions. We recognize revenue related to discovery research and software consulting agreements as contractual milestones are achieved and delivered or, absent such contractual milestones, on a completed contract basis or a percentage of completion basis. The costs of providing the services for these revenues had previously been included in Research & Development ("R&D") expenses. These costs are now presented in Cost of Sales to better reflect their direct relationship to the corresponding revenues. Prior periods have been restated to reflect the reclassification of the expenses from R&D to Cost of Sales.



(10)     Significant Customers

During the first nine months of 2001, revenues from the sale of Software Consulting products and services to Bayer AG represented 15% of Tripos' net sales. For the same period in 2000, sales to Bayer AG accounted for 1% of total net sales.

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

Forward-looking Statements

The remainder of 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. Among the factors that could cause actual results to differ materially from the forward-looking statements are set forth 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 2000. Tripos undertakes no obligation to update any forward-looking statements in this Form 10-Q.

Overview

Tripos, Inc. is a leading provider of discovery chemistry, an integrated array of discovery software, software consulting services, and discovery research services to the pharmaceutical, biotechnology, agrochemical, and other life sciences industries. Tripos combines information technology and scientific research to optimize and accelerate molecular research for the discovery of new products by its clients.

Tripos generates its revenues from a diversified offering of products and services. Our foundation is the software license and support products we sell to the life sciences industries. Over 87% of software license revenues are sold to the pharmaceutical and biotechnology industries. Tripos licenses its software and support in the form of one to three-year renewable contracts for any of its more than 50 software modules available for sale.

Our integration of chemistry and biological data in the life sciences industries creates a revenue stream for software consulting services. Tripos maintains a staff of specialists who use its proprietary data integration framework to configure customized solutions for data management. Revenue is generated on multiple billable rate plans (per day, per hour, per annual full time equivalent) and is recognized as services are performed.

We leverage our expertise in chemical compound library design technology and synthesis to develop and manufacture general screening libraries for sale to the life sciences industries. The current library of over 85,000 highly pure and diverse compounds, is marketed under the name LeadQuest®.

Tripos' sale and manufacture of chemical compound libraries has created the opportunity to offer follow-up contract research services to customers for design and synthesis of focused libraries for lead optimization. A contract of this nature may be derived from the follow-up of positive biological activity in a LeadQuest compound sold to a customer or may come from compounds originated by the customer. We now market a comprehensive research process to our life sciences customers for rapid and cost effective discovery. The process combines advanced informatics, chemistry and

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

(Continued)

biology products and services, and proprietary discovery technologies for efficient lead development, refinement, and optimization.What was separate products and services is now tightly integrated to facilitate synergies in the drug discovery process. An example of this process is the one-year multi-million dollar research agreement with Lipha S.A. to provide integrated services to identify drug candidates that began in third quarter 2000.

We also act as a reseller of computer hardware in conjunction with software sales. Hardware sales are generally made to facilitate integration of Tripos' software into customer research activities and are not a focus of Tripos' sales activities. Tripos acts merely as an authorized reseller for a single vendor and does not maintain any inventory. Accordingly, margins on these sales are relatively modest.

Tripos licenses its discovery software tools to customers, provides ongoing support, including upgrades selected by customers, and provides consulting services to its customers that enable integration of Tripos' discovery tools to customers' discovery operations. Certain long-term software licenses may, subject to certain rules of SOP 97-2 and SOP 98-4, be recognized over the life of the contract. Tripos generally expenses its 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.

We have staffed our worldwide operations to efficiently execute our business plan. The quarterly expenses include the fixed costs of research and development for software development, software consulting services, and contract research. We believe that our selling and administrative costs will remain relatively constant on a quarterly basis throughout 2001. Variability in quarterly expenses primarily occurs in relation to the level of revenues for sales compensation and bonuses.

Over the past three years Tripos has used its capital resources to fund investments in the building of chemistry production facilities, chemical compound library inventories, collaborative drug discovery programs, staffing new business segments, and investments in Arena Pharmaceuticals. In the future, we expect to dedicate available cash to maintain capital infrastructure and conduct operations.

Tripos' 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 Tripos' 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 Tripos and other vendors, changes in pricing policies by Tripos' partners and other vendors, consolidation in customer base, and changes in general economic and competitive conditions. In addition, Tripos may choose to negotiate a long-term software license contract that may, subject to certain rules of SOP 97-2 and SOP 98-4, be recognized ratably over the life of the contract. See Note 1 of the Notes to Consolidated Financial Statements for the year ended December 31, 2000 for a further discussion of revenue recognition policies. A substantial portion of revenues for each quarter is attributable to a limited number of orders and tends to be realized toward the end of each quarter. Thus, even short delays or deferrals of sales near the end of a quarter can cause quarterly results to fluctuate substantially. Tripos' quarterly results can be effected by the mix of its revenue components.

Results of Operations

Net sales for the third quarter of 2001 were $11,949 compared to $5,702 in 2000, an increase of 110%. Net sales for the nine-months year-to-date were $32,463 and $16,176 for 2001 and 2000, respectively, an increase of 101%.

For the three-months ended September 30, 2001, software licenses sales increased 112% to $4,504. For 2001, we recorded strong software license business in the U.S. and Europe in addition to continuing collaborative software development contracts. Support revenues increased 3% to $1,958 compared to the third quarter of 2000. Discovery Services sales accounted for $2,683 in the third quarter of 2001 and $1,448 in the same period in 2000, an increase of 85%. This increase in Discovery Service business was attributed to orders for compounds in the quarter in addition to continued progress on discovery research projects. Hardware sales increased to $717 for this three-month period in 2001 principally due to a large sale to a pharmaceutical customer.



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

(Continued)

For the nine-months ended September 30, 2001, software license sales increased 67% to $10,287. For 2001, we recorded strong software license business in the U.S., Europe and the Pacific Rim in addition to continuing collaborative software development contracts. Support revenues increased 3% to $5,885 compared to the first nine months of 2000. Discovery Services sales accounted for $5,598 for the first nine months of 2001 and $2,924 in the same period in 2000, resulting in an increase of 91%. This increase in Discovery Service business was from continued progress on the discovery research project with Lipha SA and strong compound sales. Hardware sales increased to $2,551 for the nine-month period in 2001. Sales to existing customers represent 91% of total net sales for the nine-month period ending September 30, 2001 compared to 86% in 2000.

Net sales for the Company's activities outside of North America represented approximately 39% and 58% for the three months ended September 30, 2001 and 2000, respectively, and were 49% and 54% for the nine-month periods of 2001 and 2000, respectively. Net sales in Europe increased 56% for the third quarter of 2001 compared to 2000 and accounted for 33% of net sales in both three-month periods. Net sales in the Pacific Rim, principally Japan, decreased 10% compared to the second quarter of 2000 and accounted for 6% and 14% of net sales for the respective periods. Year-to-date net sales in Europe increased 103% in 2001 compared to 2000 and accounted for 42% and 41% of net sales for the nine-month periods, respectively. Net sales in the Pacific Rim increased 5% compared to the first nine months of 2000 and accounted for 8% and 14% of net sales for the respective periods.

Cost of sales for the three-month period ending September 30, 2001 increased 130% compared to the same period in 2000. Cost of sales were $2,502 and $1,090 for the third quarter of 2001 and 2000, respectively. This change was due to increased costs directly related to higher sales of all products and services compared to the prior year. Cost of sales as a percent of net sales was 21% and 19% for the three-month periods in 2001 and 2000, respectively. Cost of sales were $7,211 and $3,449 for the first nine months of 2001 and 2000, respectively. For the nine-month period ending September 30, 2001, cost of sales increased 109% compared to the same period in 2000. This change was due to increased costs directly related to higher sales in all categories compared to the prior year. Cost of sales as a percent of net sales was 22% and 21% for the nine-month periods in 2001 and 2000, respectively.

Gross profit margin percentage for the third quarter of 2001 decreased to 79% from 81% of total net sales compared to 2000. For the nine months year-to-date, gross margin percentage decreased to 78% in 2001 from 79% in 2000. These changes in gross profit percentage are due to the mix of revenue in the periods.

Sales and marketing expenses increased 38% to $3,175 from $2,294 for the third quarter of 2001 compared to 2000. Sales and marketing expenses as a percentage of net sales were 27% and 40% for the three-month periods in 2001 and 2000, respectively. The decrease in percent to sales is due to higher net sales in the third quarter of 2001. Sales and marketing expenses increased 13% to $8,413 from $7,419 for the nine-month period in 2001 compared to 2000. Sales and marketing expenses as a percentage of net sales were 26% and 46% for the nine-month periods in 2001 and 2000, respectively. The decrease in percent to sales is due to higher net sales in 2001.

Research and development expenses increased to $3,335 from $2,313 and represented 28% and 41% of net sales for the three-month periods in 2001 and 2000, respectively. The increase in expense dollars reflects costs to perform research and continued development in each of our areas of expertise. Nine-month year-to-date R&D expenses were $9,057 in 2001 compared to $6,479 in 2000, 28% and 40% of net sales, respectively.

General and administrative expenses increased 41% to $1,861 for the third quarter of 2001 compared to $1,321 in 2000, and represent 16% and 23% of net sales for the respective periods. For the nine-month period ending September 30, 2001, G&A expense was $4,841 compared to $3,792 for the same period in 2000. The increase in G & A expenses in the 2001 periods are due to a one-time management consulting project completed in the quarter and bonus accruals.

Other income (expense) decreased from $245 of income for the third quarter in 2000 to expense of $33 in 2001. This change was primarily due to the effect of foreign currency transactions. Other income for the first nine months of 2001 was $2,732 compared to $508 in 2000 primarily as a result of the sale of shares of Arena Pharmaceuticals, Inc. common stock during Arena's secondary offering that occurred in June of 2001.

Income tax expense was $1,702 in 2001, which represented a year-to-date effective tax rate of 30%. No income tax benefit was recorded in 2000 due to the recognition of a valuation allowance on the future tax benefits of net operating losses in the U.K. Management believes that the net operating loss carryforwards, for which a valuation allowance was established, will be utilized in future periods. The effective tax rate utilized for the nine-months ended September 30, 2001 (30%) reflects management's estimate of such rate for the fiscal year ending December 31, 2001 and includes the utilization of some loss carryforwards. An adjustment was made in the third quarter to reduce the year-to-date effective tax rate down to the anticipated full year rate resulting in a lower than normal tax rate for the quarter.

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

(Continued)

Liquidity, Capital Resources and Capital Commitments

For the nine-month period ending September 30, 2001, net cash provided by operations was $4,050 primarily due to net income of $3,971, decrease in trade accounts receivable of $293 and prepaid expenses of $295, 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. For the nine-month in period ending September 30, 2000, net cash used by operations was $1,014 due to depreciation ($1,492), amortization ($337), decreases in accounts and notes receivable ($5,719 and $405) which were offset by the year-to-date net loss of $4,455, increases in inventories and prepaid expenses ($1,926 and $1,741), and a decrease in current liabilities ($1,585).

Cash used by investing activities in 2001 relates to property and equipment acquisitions ($1,207) needed throughout the company and an investment in the AM Pappas TechAmp II life sciences fund ($525). Cash used by investing activities in 2000 was related to purchases of property and equipment ($1,266) needed throughout the company and an increase in the investment in the restricted stock of Arena Pharmaceuticals (1,112) through the conversion of a note receivable and exercise of commons stock warrants.

Financing activities in 2001 generated funds from employee stock plans of $1,481 that were partially used to reduce outstanding debt ($781). In 2000, cash provided by financing activities came from the proceeds of the investment by Lion bioscience in Series B preferred shares ($8,971) and issuance of shares under Tripos' employee stock plans (1,234) offset by the payments on long-term debt and capital leases of $5,232.

The Company anticipates that current working capital of $23,131 together with continued cash flow from operations, payments to be received under current and contemplated strategic partnership contracts, the $4,000 line of credit and access to equipment lease financing, will be sufficient to fund its operations 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, 2000.



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

Under Section 2.13 of Article II of the Company's Bylaws, any shareholder proposal submitted with respect to Tripos, Inc.'s 2001 Annual Meeting of Shareholders, which proposal is submitted outside the requirements of Rule 14a-8 under the Securities Exchange Act of 1934, will be considered untimely if notice thereof is received by the Company before February 6, 2002 or after March 8, 2002.



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 June 30 to September 30, 2001.





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 15, 2001 | /s/ John P. McAlister                             
|----- | ----------------- | --------------------------------------------------
|      |                   | President and                                     
|      |                   | Chief Executive Officer                           
|      |                   |                                                   
|Date: | November 15, 2001 | /s/ B. James Rubin                                
|      |                   | Senior Vice President and
Chief Financial Officer,
|      |                   | Secretary                                         
|      |                   |                                                   
|Date: | November 15, 2001 | /s/ John D. Yingling                              
|      |                   | Vice President and
Chief Accounting Officer,      
|      |                   | Assistant Secretary