###### FORM 10-Q

** **

**UNITED STATES**

###### SECURITIES ANDEXCHANGE COMMISSION

**Washington****, DC  20549**

** **

(MarkOne)

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

**SECURITIES EXCHANGE ACTOF 1934**

or

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

**SECURITIES EXCHANGE ACTOF 1934**

###### For the quarterlyperiod ended March 31, 2006

** **

###### Commission FileNumber 0-23666

**TRIPOS, INC.**

(Exact Name ofRegistrant as Specified in its Charter)

** **

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

**1699 South Hanley Road**

**St. Louis****, Missouri 63144**

(Address of PrincipalExecutive Offices and Zip Code)

** **

**(314) 647-1099**

(Registrant's TelephoneNumber, Including Area Code)

** **

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

Yes    X          No         

Indicate by check mark whether the registrant isa large accelerated filer, an accelerated filer, or a non-accelerated filer (asdefined in Rule 12b-2 of the Exchange Act).

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

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

            

Number of shares outstanding of the issuer'sCommon Stock, par value $.01 per share, as of May 10, 2006:****10,192,922shares.

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**TRIPOS,INC.**

###### TABLE OF CONTENTS

|                                                                                                                                                                                     | **Page** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------|
| **PART  I  FINANCIAL INFORMATION**                                                                                                                                             |          |
| **Item  1.  Financial Statements**                                                                                                                                             |          |
|   Consolidated  Balance Sheets at March 31, 2006 (Unaudited) and December 31, 2005                                                                                        | 3        |
|   Consolidated  Statements of Operations for the Three-Months Ended 

      March  31, 2006 (Unaudited) and March 31, 2005 (Unaudited) | 4        |
|   Consolidated  Statements of Cash Flows for the Three-Months Ended 

      March  31, 2006 (Unaudited) and March 31, 2005 (Unaudited)      | 5-6      |
|   Notes  to Consolidated Financial Statements (Unaudited)                                                                                                                 | 6-24     |
|                                                                                                                                                                                     |          |
| **Item  2. Management's Discussion and Analysis of Financial Condition**

**      and  Results of Operations**                                        | 24-33    |
| **Item  3. Quantitative and Qualitative Disclosures about Market Risk**                                                                                                             | 33       |
| **Item  4. Controls and Procedures**                                                                                                                                                | 34       |
|                                                                                                                                                                                     |          |
| **PART  II  OTHER INFORMATION**                                                                                                                                                | 35       |
| **SIGNATURES**                                                                                                                                                                      | 36       |

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**PART I**

##### FINANCIALINFORMATION

** **

**Item1.  Financial Statements.**

**TRIPOS, INC.**

**CONSOLIDATED BALANCESHEETS**

(In thousands)

|                                                                                                                                                                        | **03-31-2006**          |  12-31-2005    |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------|---------------------|
| ASSETS                                                                                                                                                                                                                   | **(Unaudited) **   |                     |
| Current  assets:                                                                                                                                                                                                         |                         |                     |
|      Cash  and cash equivalents                                                                                                                                                                 | **$ 5,228 **  | $ 6,241   |
|      Accounts  receivable, less allowance for doubtful accounts of $190                                                                                                                         | **6,057 **         | 11,219         |
|      Inventory                                                                                                                                                                                  | **5,762 **         | 5,155          |
|      Prepaid  expenses                                                                                                                                                                          | **5,040 **         | 4,386          |
| Total current assets                                                                                                                                                                                                     | **22,087 **        | 27,001         |
|                                                                                                                                                                                                                          | ** **              |                     |
|    Property  and equipment, less accumulated depreciation                                                                                                                                                 | **26,039 **        | 26,789         |
|    Capitalized  development costs, less accumulated amortization                                                                                                                                          | **2,345 **         | 2,291          |
|    Goodwill                                                                                                                                                                                               | **5,272 **         | 5,255          |
|    Intangible  assets, less accumulated amortization                                                                                                                                                      | **3,432 **         | 3,554          |
|    Investments  recorded at cost                                                                                                                                                                          | **1,711 **         | 1,695          |
|    Deferred  income taxes                                                                                                                                                                                 | **231 **           | 231            |
| Total assets                                                                                                                                                                                                             | **$ 61,117 ** | $ 66,816  |
|                                                                                                                                                                                                                          | ** **              |                     |
| LIABILITIES  AND SHAREHOLDERS' EQUITY                                                                                                                                                                                    |
| Current  liabilities:                                                                                                                                                                                                    | ** **              |                     |
|      Current  portion of long-term debt                                                                                                                                                         | **$ 3,327 **  | $ 5,241   |
|      Current  portion of capital leases                                                                                                                                                         | **3,149 **         | 2,741          |
|      Accounts  payable                                                                                                                                                                          | **955 **           | 1,219          |
|      Accrued  expenses                                                                                                                                                                          | **4,387 **         | 4,970          |
|      Deferred  revenue                                                                                                                                                                          | **14,993 **        | 15,898         |
| Total current liabilities                                                                                                                                                                                                | **26,811 **        | 30,069         |
|                                                                                                                                                                                                                          | ** **              |                     |
|    Long-term  portion of capital leases                                                                                                                                                                   | **2,762 **         | 1,343          |
|    Long-term  debt                                                                                                                                                                                        | **5,914 **         | 5,891          |
|    Deferred  income taxes                                                                                                                                                                                 | **-- **            | --        |
| Shareholders'  equity :                                                                                                                                                                                                  | ** **              |                     |
|      Common  stock, $0.01 par value; authorized 20,000 shares, issued 10,193 shares as of	Mar. 31,  	     2006  and 10,190 shares as of Dec.  31, 2005. | ** 	102 **    | 102            |
|      Additional  paid-in capital                                                                                                                                                                | **41,947 **        | 41,846         |
|      Retained  deficit                                                                                                                                                                          | **(16,063)**            | (12,377)            |
|      Accumulated  other comprehensive loss                                                                                                                                                      | **(356)**               | (58)                |
| Total shareholders' equity                                                                                                                                                                                               | **25,630 **        | 29,513         |
|                                                                                                                                                                                                                          | ** **              |                     |
| Total liabilities and shareholders' equity                                                                                                                                                                               | **$ 61,117 ** | $ 66,816  |
|                                                                                                                                                                                                                          |                         |                     |

*Seeaccompanying notes.*

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**Item1.  Financial Statements (continued)**

**TRIPOS, INC.**

**CONSOLIDATED STATEMENTSOF OPERATIONS**

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

**(Unaudited)**

|                                                                 |            |            | **Three Months Ended** |
|-----------------------------------------------------------------|------------|------------|------------------------|
|                                                                 |            |            |                        | **03-31-2006** | 03-31-2005 |
| Net  sales:                                                     | ** ** | ** ** | ** **             | ** ** |  |
|    Discovery  informatics products & support | ** ** | ** ** | ** **             | **$ 5,883 ** | $ 6,263  |
|    Discovery  informatics services               | ** ** | ** ** | ** **             | **789 ** | 668  |
|    Discovery  research products & services   | ** ** | ** ** | ** **             | **1,781 ** | 8,102  |
|    Hardware                                      | ** ** | ** ** | ** **             | **17 ** | 10  |
| Total net sales                                                 | ** ** | ** ** | ** **             | **8,470 ** | 15,043  |
|                                                                 | ** ** | ** ** | ** **             | ** ** |  |
| Cost  of sales                                                  | ** ** | ** ** | ** **             | **3,567 ** | 7,907  |
| Gross profit                                                    | ** ** | ** ** | ** **             | **4,903 ** | 7,136  |
|                                                                 | ** ** | ** ** | ** **             | ** ** |  |
| Operating  expenses:                                            | ** ** | ** ** | ** **             | ** ** |  |
|    Sales  and marketing                          | ** ** | ** ** | ** **             | **3,010 ** | 2,945  |
|    Research  and development                     | ** ** | ** ** | ** **             | **2,822 ** | 1,921  |
|    General  and administrative                   | ** ** | ** ** | ** **             | **1,838 ** | 1,965  |
|    Restructuring  charge                         | ** ** | ** ** | ** **             | **927 ** | --   |
| Total operating expenses                                        | ** ** | ** ** | ** **             | **8,597 ** | 6,831  |
|                                                                 | ** ** | ** ** | ** **             | ** ** |  |
| Income (loss) from operations                                   | ** ** | ** ** | ** **             | **(3,694)** | 305  |
|                                                                 | ** ** | ** ** | ** **             | ** ** |  |
| Interest  expense                                               | ** ** | ** ** | ** **             | **(501)** | (388) |
| Other  income (loss), net                                       | ** ** | ** ** | ** **             | **291 ** | (7) |
| Loss before income tax benefit                                  | ** ** | ** ** | ** **             | **(3,904)** | (90) |
|                                                                 | ** ** | ** ** | ** **             | ** ** |  |
| Income  tax benefit                                             | ** ** | ** ** | ** **             | **(218)** | (71) |
| Net loss                                                        | ** ** | ** ** | ** **             | **$ (3,686)** | $ (19) |
|                                                                 | ** ** | ** ** | ** **             | ** ** |  |
| Basic  and diluted loss per share                               | ** ** | ** ** | ** **             | **$ (0.36)** | $ (0.00) |
| Basic  and diluted weighted average number of shares            | ** ** | ** ** | ** **             | **10,190 ** | 10,060  |

*See accompanying notes.*

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**Item1.  Financial Statements (continued)**

**TRIPOS, INC.**

**CONSOLIDATED STATEMENTSOF CASH FLOWS**

**(In Thousands)**

**(Unaudited)**

|                                                                                     | **Three Months Ended** |
|-------------------------------------------------------------------------------------|------------------------|
|                                                                                     | **03-31-2006**         | 03-31-2005 |
| **Operating  activities:**                                                          | ** **             |  |
| Net  loss                                                                           | **$ (3,686)**     | $ (19) |
| Adjustments  to reconcile net loss to 

net  cash provided by operating activities: | ** **             |  |
|    Depreciation  of property and equipment                           | **1,025 **        | 1,328  |
|    Amortization  of capitalized development costs & intangibles  | **303 **          | 180  |
|    Amortization  of debt discount                                    | **63 **           | 14  |
|    Appreciation  in foreign currency hedge instruments               | **-- **           | 2  |
|    Deferred  income taxes                                            | **-- **           | (237) |
|    Gain  from sale of marketable securities                          | **-- **           | (182) |
|    Write-down  (carrying value adjustment) of long-term investment   | **(16)**               | 88  |
|    Loss  on retirement of assets                                     | **4 **            | --  |
|    Stock-based  compensation expense                                 | **92 **           | --  |
|    Non  employee and director stock compensation expense             | **10 **           | 8  |
|                                                                                     | ** **             |  |
| Change  in operating assets and liabilities (excluding acquired business):          | ** **             |  |
|    Accounts  receivable                                              | **5,422 **        | 5,565  |
|    Inventories                                                       | **(530)**              | 1,348  |
|    Prepaid  expenses and other current assets                        | **(336)**              | (1,618) |
|    Accounts  payable and accrued expenses                            | **(1,207)**            | (3,049) |
|    Deferred  revenue                                                 | **(1,228)**            | (1,675) |
| Net cash provided by (used in) operating activities                                 | **(84)**               | 1,753  |
|                                                                                     | ** **             |  |
| **Investing  activities:**                                                          | ** **             |  |
| Purchases  of property and equipment                                                | **(112)**              | (1,076) |
| Capitalized  development costs                                                      | **(235)**              | (599) |
| Acquisition  of business, net of cash received                                      | **-- **           | (4,762) |
| Proceeds  from the sale of marketable securities                                    | **-- **           | 338  |
| Proceeds  from the sale of equipment                                                | **2,941 **        | --  |
| Investment  in unconsolidated affiliates                                            | **-- **           | (125) |
| Net cash provided by (used in) investing activities                                 | **2,594 **        | (6,224) |
|                                                                                     | ** **             |  |
| **Financing  activities:**                                                          | ** **             |  |
| Proceeds  from issuance of common stock                                             | **-- **           | 500  |
| Borrowings  under revolving line of credit                                          | **1,400 **        | 3,900  |
| Proceeds  from issuance of long-term debt and capital leases                        | **-- **           | 3,500  |
| Payments  on long-term debt and capital lease obligations                           | **(4,687)**            | (2,851) |
| Net cash provided by (used in) financing activities                                 | **(3,287)**            | 5,049  |
|                                                                                     | ** **             |  |
| Effect  of foreign exchange rate changes on cash and cash equivalents               | **(236)**              | 867  |
|                                                                                     | ** **             |  |
| Net increase (decrease) in cash and cash equivalents                                | **(1,013)**            | 1,445  |
|                                                                                     | ** **             |  |
| Cash  and cash equivalents at beginning of period                                   | **6,241 **        | 4,171  |
| Cash and cash equivalents at end of period                                          | **$ 5,228 ** | $ 5,616  |
|                                                            | ** **             |  |

*See accompanying notes.*

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**Item1.  Financial Statements (continued)**

** **

**SupplementalDisclosure of Cash Flow Information (amounts in thousands)**

Information about noncash investing activitiesnot reflected in the Consolidated Statement of Cash Flows follows:

|                                                                                               | Three Months Ended |
|-----------------------------------------------------------------------------------------------|--------------------|
| ** **                                                                                    | 03/31/2006         | 03/31/2005 |
| **Noncash investing activities**                                                              |                    |  |
|   Increase in fair value of  marketable securities, 

  net of tax effect | $ --          | $ 42 |
|   Purchase of new equipment through  capital lease financing                        | 3,108              | -- |
|                                                                                               |                    |  |

In January 2005, the Company acquired OptiveResearch, Inc. for $4,770 in cash, 600 shares of the Company's common stockvalued at $3,200 and direct costs of the acquisition.  The related assets andliabilities at the acquisition date were as follows:

|   Cash                              | $ 647    |
|-----------------------------------------------|--------------------|
|   Accounts receivable               | 809           |
|   Prepaids & other              | 30            |
|   Equipment, net                    | 40            |
|   Intangible assets                 | 4,080         |
|   Goodwill                          | 4,177         |
|     Total assets acquired | 9,783         |
|                                               |                    |
|   Accounts payable                  | (422)              |
|   Accrued expenses                  | (97)               |
| **  **Deferred revenue              | (655)              |
|   Common stock issued to sellers    | (3,200)            |
|                                               |                    |
|   Cash paid                         | $ 5,409  |

**TRIPOS, INC.**

**NOTES TO UNAUDITEDCONSOLIDATED FINANCIAL STATEMENTS**

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

**(1)     Summaryof Significant Accounting Policies**

#### Organization

Our discovery informatics and discovery researchproducts and services enable life science companies to better perform theirdrug discovery.  We combine our resources in computer-aided molecular design,cheminformatics, chemistry research and production, with the expertise of scientistson our staff to address the challenges facing pharmaceutical research organizations.We deliver products and services internationally recognized for their innovationand quality.  By creating new chemical compounds and aiding our partners'design of new chemical compounds in ways that we believe are more likely toresult in drug discoveries, we offer our customers advantages in terms ofresearch cycle time, cost, and efficiency of research activities.

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**Item1.  Financial Statements (continued)**

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

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

Our business model is based primarily onderiving revenues from our discovery informatics and discovery researchbusinesses as follows:

•        *DiscoveryInformatics Products and Services.*  The SYBYL® and UNITY®software suites are the foundation of our discovery informatics product(software) offerings.  These suites provide integrated tools for computer-aidedmolecular modeling and visualization, virtual screening, combinatorial librarydesign, data storage and analysis, and structure-activity relationships tocustomers in pharmaceutical, biotechnology and related life science fields ofresearch.  We offer over fifty (50) software products for these researchareas.  Key components of these products arebeing packaged as web services as part of Tripos' Service-Oriented Informaticsstrategy, designed to make the company's valuable discovery tools adaptable toeach scientist's workflow in the new rapidly evolving informatics environment. In 2005, we launched the Windows®-based BenchwareTM suite,used by laboratory researchers to support synthesis and testing decisions;digitally store, search and retrieve research information; and shareexperimental results with project team members, including computationalscientists.  These products and technologies are provided to ourcustomers through a license arrangement, while certain of the enterprise-widetechnologies also involve systems integration and other services to facilitatea smooth implementation.  Customized software development projects can also bean avenue to assist customers to resolve specific research issues that requirenew scientific methods, techniques and analytical tools.

•        *DiscoveryResearch Products and Services.*Tripos Discovery Research Centre, based in theUnited Kingdom, offers compound design and synthesis, molecular analysis, a completesuite of lead discovery and lead optimization capabilities and newly introducedtarget-specific chemical libraries on which Tripos has applied for patentprotection (LeadDiscovery libraries).  Tripos offersoff-the-shelf libraries of compounds sold for pharmaceutical screeningpurposes.  We also participate with our customers in strategic chemistryresearch projects, primarily on a fee for service basis.  In a few cases, thetransfer of intellectual property rights for these therapeutic collaborationsmay include royalty or milestone payments associated with advancement of thecompounds through various stages of drug development.  In addition, Tripos'newly introduced target-specific libraries are intended to be a platform forour further collaborative development with clients.

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

We have a geographically diversecustomer base, with approximately 49% of our revenues derived from customers outside of North America.  Our worldwide sales force operates from offices in the United States, Canada, England, France, and Germany, and through representatives around the Pacific Rim.  Our headquarters is in St. Louis, Missouri and our chemistry laboratory is in Bude, England.

** **

**Basisof Presentation**

The accompanying unaudited consolidatedfinancial statements have been prepared in accordance with generally acceptedaccounting principles for interim financial information and with theinstructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, theydo not include all of the information and footnotes required by accountingprinciples generally accepted in the United States for complete financialstatements.  In the opinion of management, all normal recurring adjustmentsnecessary for a fair presentation of such financial statements have beenincluded.  For a further description of accounting policies, please refer tothe "Description of Business and Summary of Significant AccountingPolicies" section in the Company's annual report on Form 10-K for the yearended December 31, 2005.  Operating results for the three-month periods endedMarch 31, 2006 are not necessarily indicative of the results that may beexpected for the year ending December 31, 2006.

** **

**Revenue Recognition **

**     **

**Discovery Informatics Products and Support**

** **

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

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

We allocate revenues from perpetual softwarearrangements involving multiple elements to each element based on the relativefair values as determined by the VSOE for each element.  We limit ourassessment of VSOE for each element to the price charged when the same element issold separately.  We have analyzed all of the elements included in ourmultiple-element arrangements and determined that we have sufficient VSOE toallocate revenues to maintenance and support services, and training.  We selltraining separately and have established VSOE on this basis.  VSOE formaintenance and support is determined based upon the renewal rates in contractsthemselves, which is based on a fixed percentage of the current perpetuallicense list price.  Accordingly, assuming all other revenue recognitioncriteria are met, revenues from perpetual licenses are recognized upon deliveryof the software using the residual method in accordance with SOP 98-9,"Modification of SOP 97-2, Software Revenue Recognition, with Respect toCertain Transactions." 

Software maintenance agreementsprovide technical support and the right to unspecified enhancements and upgradeson a "when-and-if-available" basis.  Post-contract support revenues onperpetual agreements are recognized ratably over the term of the support period(generally one year), and training
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**Item 1.  Financial Statements (continued)**

and other service revenues are recognized as therelated services are provided.  Any unrecognized portion of amounts paid inadvance for licenses and services is recorded as deferred revenue.

**Discovery Informatics Services**

Discovery Informatics Services (DIS) representcontracts for the development of packaged Tripos software and/or for thedevelopment and delivery of enterprise-wide customized software (such as laboratoryinformation systems or database integration projects).  Technologicalfeasibility exists on these software arrangements as they normally leverage ourexisting products or techniques.  These arrangements typically includeinstallation at the customer's site.  We account for these arrangements inaccordance with SOP 81-1, as required by SOP 97-2 since the contract to deliversoftware and installation requires significant production, modification orcustomization of software.

In applying the provisions of SOP 81-1 thepercentage of completion is utilized.  For contracts where customer approval ofcontractually required tasks must occur at each distinct milestone, and whereamounts billable are indicative of progress-to-completion, we record revenues whena milestone has been met and accepted by the customer.  For contracts withoutdistinct milestones, we measure progress using the cost-to-cost method(cumulative costs as a percentage of total expected costs to complete), whichapproximates progress towards completion.  When current estimates of totalcontract revenue and contract cost indicate a loss, a provision for the entireloss on the contract is made in the period that the loss becomes evident.

DIS also includes software development("SD") projects that are contractual arrangements with customers foruse of our software developers in an effort to develop a scientific softwaretool for use in drug discovery.  Billings may be on a time and materials basis;accordingly, we record the related revenue when the time and costs are incurredat the stated contractual rates.  Other contracts may be accounted for undermilestone or completed contract basis depending on the negotiated terms.  Forthese arrangements, cost and revenues are deferred until achievement of themilestone or completion of the contract. 

**Discovery Research Products and Services**

Discovery research sales include:  (1) sales ofchemical compounds from inventory, (2) sales of compounds with associatedexclusive intellectual property, (3) long-term contracts to design and producechemical compounds to customer specifications, or (4) contracts to performdiscovery research activities. 

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

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

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

finished goods are delivered (under the units ofdelivery method).  The contract costs related to delivered compounds arerecorded to cost of sales as the compounds are delivered and revenue isrecognized.

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

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

**Hardware Sales**

Hardware sales are recorded upon shipment of theproduct to the customer.

**Stock-Based Compensation**

Prior to January 1, 2006, we accounted forstock-based compensation plans under the intrinsic value method as permittedunder Accounting Principles Board Opinion No. 25 ("APB 25"), "*Accountingfor Stock Issued to Employees*", and related Interpretations.  UnderAPB 25, generally no compensation expense was recognized because the exerciseprice of the options equaled the fair value of the stock at the grant date.

EffectiveJanuary 1, 2006, we adopted the fair value recognition provisions of SFASNo. 123R ("FAS 123R"), "Share-Based Payment," using themodified-prospective transition method.  Under this transition method,compensation expense was recognized beginning January 1, 2006 and includes(a) compensation expense for all share-based employee compensationarrangements granted prior to, but not yet vested as of January 1, 2006,based on the grant date fair value estimated in accordance with the originalprovisions of FAS 123, and (b) compensation expense for all share-basedemployee compensation arrangements granted subsequent to January 1, 2006,based on the grant date fair value estimated in accordance with the provisionsof FAS 123R.  Results for prior periods have not been restated.  See Note 14 ofthe Notes to Consolidated Financial Statements in this Form 10-Q for furtherdiscussion of stock-based compensation.

** **

**IncomeTaxes**

** **We  account for income taxes in accordance with Statement of Financial Accounting  Standards No. 109 ("FAS 109"), *Accounting for Income Taxes,* which  prescribes the use of the asset and liability method whereby deferred tax  assets or liabilities are calculated at the balance sheet date using current  tax laws and rates in effect.  Valuation allowances are established when  necessary to reduce deferred tax assets when it is more likely than not that a portion or all of  the deferred tax assets will not be realized.  In accordance with FAS109, income tax expense includes 1) deferred tax expense, which generallyrepresents the net change in the deferred tax asset or liability balance duringthe period plus any change in valuation allowances, and 2) current tax expense,which represents the amount of tax currently payable

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

to or receivable from ataxing authority.  The primary difference between financial statement incomeand taxable income results from the use of different methods of computingdepreciation, capitalized development cost, certain revenue recognition activities,other timing differences and the valuation of net operating losscarryforwards.  Deferred taxes do not reflect temporary differences relating toour investment in foreign subsidiaries as these amounts have been deemed to bepermanently invested.  Estimating the deferred tax position on these amounts isnot practical.****

 

The effective tax rate reflectsmanagement's current estimate of the distribution of earnings among thestatutory jurisdictions in which we operate and the valuation of certain taxcredits and net operating losses in the U.S. and U.K. from prior tax years(each ending December 31).  Valuation allowances established for deferred taxassets related to net operating losses does not impair our ability to use thosedeferred tax assets upon achieving profitability in the related jurisdictions. Upon the recognition of income in future periods in the jurisdictions where thedeferred tax assets were created, release of the corresponding valuationallowances may result in a lower effective tax rate.

**Recent Accounting Pronouncement**

In November 2004, the Financial AccountingStandards Board ("FASB") issued Statement of Financial AccountingStandards ("SFAS") No. 151 "Inventory Costs-an amendment of ARBNo. 43, Chapter 4" ("FAS 151").  FAS 151 clarifies theaccounting for abnormal amounts of idle facility expense, freight, handlingcosts, and wasted material (spoilage) to require that these items be includedas current-period charges and not included in overhead.  In addition, FAS 151requires that allocation of fixed production overheads to the costs ofconversion be based on the normal capacity of the production facilities.  Theprovisions in FAS 151 are effective for inventory costs incurred during fiscalyears beginning after June 15, 2005. We have adopted FAS 151 effective January1, 2006.  The adoption of FAS 151 coincided with the completion of ourfour-year $90 million file enrichment project with Pfizer.  As a result, thereare more current period charges of approximately $275 in the first quarter of2006 and we are estimating approximately $975 for fiscal year 2006 based upondecreased production.

In May 2005, the FASB issued SFAS No. 154"Accounting Changes and Error Corrections-a replacement of APB Opinion No.20 and FASB Statement No. 3" ("FAS 154").  FAS 154 requiresretrospective application to prior periods' financial statements of changes inaccounting principle, unless it is impracticable to determine either theperiod-specific effects or the cumulative effect of the change.  When it isimpracticable to determine the period-specific effects of an accounting changeon one or more individual prior periods presented, FAS 154 requires that thenew accounting principle be applied to the balances of assets and liabilitiesas of the beginning of the earliest period for which retrospective applicationis practicable and that a corresponding adjustment be made to the openingbalance of retained earnings for that period rather than being reported in anincome statement.  When it is impracticable to determine the cumulative effectof applying a change in accounting principle to all prior periods, then FAS 154requires that the new accounting principle be applied as if it were adoptedprospectively from the earliest date practicable.  The provisions of FAS 154are effective for accounting changes and corrections of errors made in fiscalyears beginning after December 15, 2005.  We have adopted the provision of FAS154 effective January 1, 2006.  The adoption of FAS 154 did not have any impacton our financial statements.

| 11 |
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----

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

**(2)     ComprehensiveIncome (Loss)**

The components of comprehensive income, net ofrelated tax, for the three-month periods ended March 31, 2006 and 2005 were asfollows:

|                                                               |       |   | **Three-month Period** |
|---------------------------------------------------------------|------------|--------|------------------------|
|                                                               | ** ** |        |                   | **03-31-2006** | 03-31-2005 |
| Net loss                                                      | ** ** |        |                        | **$ (3,686)** | $ (19) |
| Unrealized gain (loss) on marketable  securities              | ** ** |        |                        | **-- ** | 42  |
| Less: reclassification for gains included in  net income | ** ** |        |                        | **-- ** | (113) |
| Foreign currency translation adjustments                      | ** ** |        |                        | **(298)** | 509  |
| Comprehensive income (loss)                                   | ** ** |        |                        | **$ (3,984)** | $ 419  |

The components of accumulated othercomprehensive loss, net of related tax, at March 31, 2006 and December 31, 2005were as follows:

|                                          | **03-31-2006**   | 12-31-2005  |
|------------------------------------------|------------------|-------------|
| Foreign currency translation adjustments | **$ (356)** | $ (58) |
| Accumulated other comprehensive (loss)   | **$ (356)** | $ (58) |

**(3)     ContingentLiabilities**

*Securities Class Action Litigation*

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

 

On March 21, 2006, the parties reached a verbalagreement to settle the class action litigation.  The total amount of thesettlement is $3,150 which is to be paid by our insurers.  The settlement issubject to court approval after notice and an opportunity to object is providedto the putative shareholder class.  There can be no assurance that thesettlement will be approved, in which case we will continue to vigorously defendourselves against these claims.  

* *

| 12 |
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----

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

* *

**(3)     ContingentLiabilities (continued)**

* *

*Shareholder Derivative Litigation*

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

On March 21, 2006, theparties reached a verbal agreement to settle this litigation, subject to finaldocumentation and court approval, involving the implementation of certainpolicies and procedures by the Company and the payment of attorneys' fees of$200 to plaintiffs' counsel.  All fees are to be paid by our insurers.  Therecan be no assurance that the settlement will be approved in which case, we willcontinue to vigorously defend ourselves against these claims.  

*Grant Programs*

In 2002, Tripos, Inc.and its U.K. subsidiary, Tripos Discovery Research Ltd. ("TDR") was awarded aGBP2400 grant by the U.K Department of Trade and Industry ("DTI") based on thecreation of jobs in the region and capital investment.  In 2002 and 2004 we metall criteria for the first and second installments and received GBP550 andGBP990, respectively.  We are obligated to repay portions or all of the grantmoney received for a period of up to 24 months after our last draw under theDTI grant programs if we eliminate jobs or exit the property.  On January 24,2006 we reduced headcount as described in Note 11 by seventy-six positions. Calculation of any amounts repayable to the U.K. government is based onemployee staffing levels at December 31, 2006.  Actual staffing levels at thatdate will be compared to staffing levels previously funded by the grant.  Anyshortfall in actual staffing may require repayment to the DTI calculated at a rateof GBP17 per employee up to a maximum amount of GBP1,500 (approximately $2,600). The Company is not able to estimate any potential liability at this time asstaffing levels may continue to fluctuate throughout 2006.  

**(4)     SignificantCustomer **

** **

During the first quarter of 2005, Pfizer, Inc.represented 46% of total net sales.  We provided products and services toPfizer under three separate contracts: multi-year worldwide licenses to ourdiscovery software products, multi-year collaborative software developmentproject and a $90 million four-year discovery research project to design andsynthesize exclusive compound libraries which was completed in the fourthquarter 2005.  We continue to provide multi-year worldwide licenses to ourdiscovery software products to Pfizer during 2006, however revenues from Pfizerhave dropped below 10% of first quarter 2006 total revenue.  No other customersrepresented over 10% of total net sales in either period. 

** **

** **

| 13 |
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----

**Item 1.  FinancialStatements (continued)**

** **

**(5)     Earnings(Loss) Per Share** 

The following table sets forth the computationof basic and diluted earnings per share for the three-month periods ended March31, 2006 and 2005.

|                                                                                                          |            |            | **Three-months Ended** |
|----------------------------------------------------------------------------------------------------------|------------|------------|------------------------|
|                                                                                                          | ** ** |            |                        | **03-31-2006** | 03-31-2005 |
| **Numerator:**                                                                                           | ** ** |            |                        | ** ** |  |
| Numerator for basic earnings per share-  -net income (loss) allocable to common shareholders             | ** ** |            |                        | ******$ (3,686)** | $ (19) |
| ** **

**Denominator:**                                                                             | ** ** |            |                        | ** ** |  |
| Denominator for basic earnings per share--  -weighted average shares                                     | ** ** |            |                        | ******10,190 ** | 10,060  |
| Effect of dilutive securities:                                                                           | ** ** | ** ** | ** **             | ** ** | ** ** |
|    Employee stock options    --Note A                                           | ** ** |            |                        | **-- ** | --  |
| Denominator for diluted earnings  per share--  -adjusted weighted average shares and assumed conversions | ** ** |            |                        | ******10,190 ** | 10,060  |
| **Basic** and diluted loss per share                                                                     | ** ** |            |                        | **$ (0.36)** | $ (0.00) |

--Note A: For the three-months ended in 2006 and2005, weighted average shares outstanding did not include 4 shares and 78shares, respectively, related to the effect of employee stock options as theirinclusion would have been anti-dilutive.

For additional disclosures regarding earningsper share, see the notes to the Company's 2005 consolidated financialstatements in its Form 10-K.

** **

**(6)     Inventory**

We maintain a physical inventory of chemicalcompound libraries in various states of completion for LeadQuest, LeadDiscoveryand customer-specific chemistry research projects.  Costs associated with themanufacture of compounds are calculated using the standard cost method and arecarried at the lower of cost (standard cost method approximating FIFO) ormarket.  In calculating the reserve for obsolescence, collections of compoundsare reviewed for their age, possible chemical degradation and cumulative salestrends, and if necessary, a reserve provision is made so that the carryingvalue is at or below the respective net realizable values.  If there is, in ouropinion, a significant adverse deviation in sales trends for a specificcompound collection or library, an additional reserve provision is taken.  Aportion of the LeadQuest inventory is used in discovery research projects.  Amortizationof this inventory is recorded in the reserve for obsolescence over its 10-yearexpected useful life.  Similarly, LeadDiscovery libraries containing patentedcompound series are amortized over the anticipated patent life.  The remainingLeadDiscovery libraries are amortized over a 10-year period.  Amortizationrelated to these inventory items was $22 during the first quarter 2006.  In allcases, customers may purchase any or all remaining quantities of LeadQuest orLeadDiscovery libraries.  Work in process and finished goods inventory includesthe accumulated cost of compounds in production or awaiting shipment tocustomers under discovery research or custom synthesis contracts.  

| 14 |
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----

**Item1.  Financial Statements (continued)**

** **

**(6)     Inventory(continued)**

Inventory balances at March 31, 2006 andDecember 31, 2005 were:

|                                                                                                                                    | **03-31-2006**         | 12-31-2005         |
|------------------------------------------------------------------------------------------------------------------------------------|------------------------|--------------------|
|      Raw materials                                                                                        | **$ 1,837 ** | $ 1,763  |
|      Work in process                                                                                      | **4,118 **        | 3,339         |
|      Finished goods                                                                                       | **3,177 **        | 3,217         |
|      Reserve for  obsolescence                                                                            | **(3,370)**            | (3,164)            |
|          Total  inventory                                                             | **$ 5,762 ** | $ 5,155  |
| Costs of discovery research customer projects  included in       Work in Process and Finished Goods above | **$ 669 **   | $ 534    |

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

Certain time-basedsoftware license arrangements are covered by non-cancelable agreements whoseterms generally range from one to five years.  The typical term of thecontracts is three years.  Revenue from these time-based software licensearrangements is recognized ratably over the agreed term.  The following tableshows the amount of revenues to be recognized from these non-cancelablearrangements after March 31, 2006:

|  | Revenues to be  recognized in:                 | Amount        |
|--|------------------------------------------------|---------------|
|  |    2006  (remaining 3 quarters) | $ 12,972 |
|  |    2007                         | 6,249         |
|  |    2008                         | 1,295         |
|  |    2009  and later              | 113           |
|  | Total                                          | $ 20,629 |

Tripos is typically paid annually under thesecontracts.  Shown below are the amounts to be billed under these contractssubsequent to March 31, 2006 (amounts not included in the accompanying balancesheets at March 31, 2006).

|  | Amounts to be billed  in: | Amount       |
|--|---------------------------|--------------|
|  |    2006    | $ 6,644 |
|  |    2007    | 2,841        |
|  |    2008    | 265          |
|  | Total                     | $ 9,750 |

** **

** **

**(8)     Debt Facilities**

As of March 31, 2006 we had existing creditfacilities provided by LaSalle Bank in the form of a revolving line of creditand a mortgage loan for our corporate headquarters building, due to expire onApril 18, 2006 and 2008, respectively.  The credit facilities arecollateralized by substantially all of our U.S. assets and stock pledges foreach of the U.S. and U.K. subsidiaries.

In April 2006, the Company and LaSalle Bankcompleted an amendment to the existing credit facility and mortgage loan.  Theterm of the revolving line of credit was extended to January 1, 2007 and the 

| 15 |
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----

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

** **

**(8)     Debt Facilities(continued)**

borrowingcapacity was amended to $6,000.  Covenants under the amended credit facility replacedthose that would have been in existence on March 31, 2006.  The amended line ofcredit will have a borrowing base of 80% of domestic and insured foreignaccounts receivable plus $1,800 allowance of excess equity in U.S. real estate, a revised minimum shareholders' equity covenant tested quarterly and a minimumconsolidated cash balance covenant tested monthly.  The annual clean-downrequirement was eliminated.  Interest on the mortgage loan was modified toLIBOR plus 3.0%.  All other terms of the revolving line of credit remain thesame.  Borrowing base availability was $3,400 and we had $2,500 of borrowingsoutstanding at March 31, 2006.  The mortgage note calls for even quarterlyprincipal payments based on a twenty-year amortization schedule.  Interestrates paid by the Company on the mortgage averaged 6.8% during the firstquarter of 2006.  As of March 31, 2006, $3,643 was remaining on the mortgage.

Priorto the April 2006 amendment, the revolving facility was a one-year commitmentfor a $6,500 line of credit. Covenants under the revolving facility includedminimum interest coverage, minimum shareholders' equity, maximum capitalexpenditure and an annual clean down period of 30 consecutive days in which noborrowings were to be outstanding.  We were in compliance with all covenants asof March 31, 2005 and achieved the 30-day clean down provision in September2005.  The line of credit carries a commitment fee of 3/8% of the unusedportion of the line.  Due to the one-year commitment of the amended creditfacility, draws on the line of credit were classified as short-term debt.

Inconnection with the Optive acquisition, the Company issued a subordinatedpromissory note to Horizon Technology Finance with a face value of $3,500 and astated interest rate of 11.42%.  The repayment terms of the promissory noterequire monthly interest only payments of $33 for the first 18 months, followedby 30 monthly principal and interest payments of $135 beginning on August 1,2006.  Each payment of principal will be accompanied by payment of accrued butunpaid interest to the date of the payment.  The subordinated promissory notecontains prepayment penalties.  In addition, as part of the financingtransaction, 112 shares of common stock were issued to Horizon and Sand HillCapital at a discounted price of $4.48 per share.  Warrants to purchase 156 commonshares were issued to Horizon at a negotiated price of $4.48.  Thesetransactions resulted in original issuance debt discount of $89 related to thecommon stock issued at a discount and $432 related to the warrants, calculatedbased upon relative fair values.  The debt discounts are being amortized tointerest expense over the life of the loan using the effective interest ratemethod.  

**(9)     CapitalLease Financing**

** **

InMarch 2006, we sold certain equipment at our research laboratory and leased theequipment back under a three year capital financing lease.  The proceedsreceived of $2,941 were equal to the net book value of the equipment, resultingin no gain or loss on the transaction, and were recorded as a capital leaseliability.  The equipment is still actively utilized in our operations, remainson our books and continues to be depreciated.  Quarterly payments go to reducethe capital lease liability.  Computer equipment valued at $167 was acquiredwith capital lease financing at our U.S. headquarters.

| 16 |
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----

**Item 1.  FinancialStatements (continued)**

** **

**(10)     Goodwilland Other Intangible Assets**

** **

At March 31, 2006 andDecember 31, 2005, the Company had the following intangible asset balances: 

|                        |  | March 31, 2006 |  | December 31, 2005 |
|------------------------|--|----------------|--|-------------------|
|                        |  | Gross          |  |                   |  | Gross |  |  |
|                        |  | Carrying       |  | Accumulated       |  | Carrying |  | Accumulated |
|                        |  | Amount         |  | Amortization      |  | Amount |  | Amortization |
| Acquired software      |  | $ 3,590   |  | $ 477        |  | $ 3,590 |  | $ 382 |
| Noncompete agreements  |  | 350            |  | 116               |  | 350 |  | 92 |
| Patents and trademarks |  | 192            |  | 107               |  | 192 |  | 104 |
| Total                  |  | $ 4,132   |  | $ 700        |  | $ 4,132 |  | $ 578 |

Amortized intangible assets have the following weightedaverage useful lives as of March 31, 2006:  acquired software -- 14.4 years;non-compete agreements -- 3.9 years; patents and trademarks -- 16.7 years; andintangible assets in total -- 13.6 years.

Amortization expense was approximately $122 and $47for the three-month periods ended March 31, 2006 and 2005, respectively. Estimated annual amortization expense for the next 5 years is: 2006 - $486;2007 - $476; 2008 - $475; 2009 - $391 and 2010 - $9.

The changes in the carrying amount of goodwill forthe three months ended March 31, 2005 are as follows:

|                                           |  | Discovery    |  | Discovery  |  |              |
|-------------------------------------------|--|--------------|--|------------|--|--------------|
|                                           |  | Informatics  |  | Research   |  | Total        |
| Balance at December  31, 2005             |  | $ 4,308 |  | $ 947 |  | $ 5,255 |
| Foreign currency  translation adjustments |  | --      |  | 17         |  | 17           |
| Balance at March 31,  2006                |  | $ 4,308 |  | $ 964 |  | $ 5,272 |

The goodwill related toDiscovery Informatics is not tax deductible.

** **

**(11)**    **Restructuring Charge**

** **

OnJanuary 24, 2006 we completed a reduction in force for our Discovery Researchbusiness based in Bude, England which was previously announced on December 19,2005.  This action coincided with the conclusion of the 30-day consultationperiod with employees mandated by U.K. law.  We reduced the number of employeesby 76 positions to streamline and refine our Discovery Research business andassociated cost structure as a result of our fourth quarter 2005 completion of thefour-year $90 million file enrichment project with Pfizer Inc.  More than halfof the employees affected left the Company under a voluntary separation plan. In addition, a restructuring of our US based employees resulted in a staffreduction of 9 employees.  As a result of these actions, the Company recorded apre-tax restructuring charge in the first quarter 2006 of approximately $807and $120 related to our Discovery Research and Discovery Informatics divisions,respectively, for one-time termination benefits and outplacement costs.  Thesecosts are recorded in the consolidated statement of operations in therestructuring charge line item.  All costs associated with these restructuringsare expected to be paid by the end of the second quarter.

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

** **

**(11)**    **Restructuring Charge(continued)**

Thefollowing table summarizes the restructuring activity as of March 31, 2006:

|                                    |  | Discovery Informatics |  | Discovery Research |  | Total      |
|------------------------------------|--|-----------------------|--|--------------------|--|------------|
| Restructuring  charge              |  | $ 120       |  | $ 807    |  | $927  |
| Cash  payments                     |  | (114)                 |  | (803)              |  | (917)      |
| Accrual  balance at March 31, 2006 |  | $ 6         |  | $ 4      |  | $10   |

** **

** **

**(12)     Long-termInvestments**

Since2001, we have invested in the Life Science Ventures II fund administered byA.M. Pappas.  This fund invests in new and developing companies in the lifescience sector.  Our investment commitment of $2,500 represents approximately2.0% of the total capital of the fund.  As of March 31, 2006 we had invested$2,075 or 83% of our total commitment.  The fund's managers record investmentimpairments when identified, for which we recognize our pro-rata share of suchimpairments.  During the first quarter of 2006, we made an adjustment to ourcarrying value by $16 to reflect our current pro-rata share.  During the firstquarter of 2005, we recorded our pro-rata share of impairments totaling $88. Our net investment balance in the A.M. Pappas Life Science Ventures II Fund atMarch 31, 2006 totals $1,520, and is reflected in investments recorded at coston the balance sheet. 

Duringthe third quarter 2005, we received shares of Infinity Pharmaceuticals, aprivate cancer drug discovery and development company, valued at $191 as partof an early termination agreement for a software license contract.  Compensationfor the early termination agreement consisted of cash plus shares andrepresented the full value of our software license agreement.  Our investmentin the shares is also recorded in investments recorded at cost on the balancesheet.  In April 2006, Infinity Pharmaceuticals announced its intent to mergewith Discovery Partners International, Inc. to become a public company.

** **

**(13)     Segments**

The Company operates intwo reporting segments, Discovery Informatics and Discovery Research.  TheCompany's Discovery Informatics segment designs, or in-licenses, and sellslicenses to software suites that provide computer-aided molecular modeling andvisualization, virtual screening, combinatorial library design, data storageand analysis, and structure-activity relationships to customers inpharmaceutical, biotechnology and related life science fields ofresearch.  The Company's Discovery Research segment provides drugdiscovery services to pharmaceutical and biotechnology companies.  High-endservices offered are based on application by Tripos of its proprietaryhigh-throughput combinatorial chemistry, and our ChemSpace database searchingand selection technologies, including the Lead Hopping method for quick identificationof alternative chemistries for customer's needs.

| 18 |
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**Item1.  Financial Statements (continued)**

** **

**(13)     Segments(continued)**

Summarized financialinformation concerning the industry segments follows:

DI = Discovery Informatics

DR = Discovery Research

|                                                                | **Three Months-End March 31,** |
|----------------------------------------------------------------|--------------------------------|
|                                                                | **2006**                       |  | 2005 |
|                                                                | **DI**                         | **DR** | **Total** |  | **DI** | **DR** | **Total** |
| Revenues:                                                      |                                |  |  |  |  |  |  |
| DI products (including  hardware)                              | $ 5,900              | $ --  | $ 5,900  |  | $ 6,273 | $ -- | $ 6,273  |
| DI services                                                    | 789                       | --  | 789  |  | 668 | -- | 668  |
| DR products &  services                                    | --                        | 1,781  | 1,781  |  | -- | 8,102 | 8,102  |
| Total revenues                                                 | 6,689                     | 1,781  | 8,470  |  | 6,941 | 8,102 | 15,043  |
|                                                                |                                |  |  |  |  |  |  |
| Depreciation &  amortization (2)                           | 562                       | 722  | 1,284  |  | 390 | 1,028 | 1,418  |
| Non-allocated corporate (2)                                    |                                |  | 44  |  |  |  | 90  |
| Depreciation & amortization on  statement of operations    |                                |  | 1,328  |  |  |  | 1,508  |
|                                                                |                                |  |  |  |  |  |  |
| Operating income (loss)                                        | (129)                          | (2,170) | (2,299) |  | 1,093 | 683 | 1,776  |
| Non-allocated corporate departments                            |                                |  | (1,395) |  |  |  | (1,471) |
| Operating income (loss) on  per   statement of operations |                                |  | (3,694) |  |  |  | 305  |
|                                                                |                                |  |  |  |  |  |  |
| Long-lived assets                                              | 15,810                    | 21,278  | 37,088  |  | 17,471 | 24,230 | 41,701  |
|                                                                |                                |  |  |  |  |  |  |
| Total assets (1)                                               | 25,936                    | 29,953  | 55,889  |  | 28,829 | 41,381 | 70,210  |
| Consolidated cash                                              |                                |  | 5,228  |  |  |  | 5,616  |
| Total assets on balance  sheet                                 |                                |  | $ 61,117  |  |  |  | $ 75,826  |

* *

(1)   Excludescash and cash equivalents of $5,228 and $5,616 in 2006 and 2005, respectivelyas cash and cash equivalents are monitored only on a consolidated basis.

(2)   Certainprior year depreciation and amortization amount have been reclassified toconform to current year format.

** **

**(14)      Stock-basedCompensation**

Prior to January 1, 2006, we accounted forstock-based compensation plans under the intrinsic value method as permittedunder Accounting Principles Board Opinion No. 25 ("APB 25"), "*Accountingfor Stock Issued to Employees*", and related Interpretations.  UnderAPB 25, generally no compensation expense was recognized because the exerciseprice of the options equaled the fair value of the stock on the grant date.

| 19 |
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**Item1.  Financial Statements (continued)**

** **

**(14)      Stock-based Compensation(continued)**

Effective January 1, 2006, we adopted thefair value recognition provisions of SFAS No. 123R ("FAS 123R"),"Share-Based Payment," using the modified-prospective transition method.  Underthis transition method, compensation expense was recognized beginningJanuary 1, 2006 and includes (a) compensation expense for allshare-based employee compensation arrangements granted prior to, but not yetvested as of January 1, 2006, based on the grant date fair value estimatedin accordance with the original provisions of FAS 123, and(b) compensation expense for all share-based employee compensationarrangements granted subsequent to January 1, 2006, based on the grantdate fair value estimated in accordance with the provisions of FAS 123R.  Underthe modified-prospective transition method of FAS 123R, results for priorperiods are not restated. 

As a result of adoptingFAS 123R on January 1, 2006, earnings before income taxes and net incomefor the three months ended March 31, 2006 were both $92 lower, than if wehad continued to account for share-based compensation under APB No. 25.  Basicearnings per share for the three months ended March 31, 2006 was reducedby $0.01 per share as result of the adoption of this statement.  The majorityof options granted by the Company qualify as Incentive Stock Options (ISO) forwhich no tax benefit is available to be recognized until the options areexercised and sold by the grantee within one year of exercise.  Typically, Non-Qualifying(NQ) options provide a deferred tax benefit to the Company at the time of grantand normally a tax benefit in the year of exercise.  However, due to theCompany's present net deferred tax asset position, a valuation allowance wasrecorded to offset the projected tax benefit from the compensation expenserecorded in the 2006 quarter.  The Company will only realize the tax benefitswhen and if they result in an actual reduction in taxes payable.

Prior to the adoption of FAS 123R, we presentedtax benefits for which we received deductions resulting from the exercise ofstock options as operating cash flows in the Consolidated Condensed Statementsof Cash Flows.  FAS 123R requires the cash flows from the tax benefitsresulting from tax deductions in excess of the compensation expense recognizedfor those options (excess tax benefits) to be classified as financing cashflows.  There were no exercises of stock options in the first quarter of 2006. The effect of FAS 123R on our consolidated statement of cash flows for thequarter was to add back the $92 of non-cash compensation expense to the cashflows from operating activities.  Since no options were exercised during thefirst quarter of 2006, no tax benefits were recorded as financing proceeds inthe cash flow statement.

The following tableillustrates the effect on the first quarter 2005 net earnings and earnings per basicand diluted common share if we had applied the fair value recognitionprovisions of FAS 123 to options granted under our stock-based employeecompensation plans.  For purposes of this pro forma disclosure, the value ofthe options was estimated using a Black-Scholes option-pricing valuation modeland amortized to expense over the options' vesting periods. 

| 20 |
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**Item1.  Financial Statements (continued)**

** **

**(14)      Stock-basedCompensation (continued)**

|                                                                                                                                                                                                             |       |            | Three-month Period |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|--------------------|
|                                                                                                                                                                                                             |       |            |                    | 03-31-2005 |
| Net  loss as reported                                                                                                                                                                                       | ** ** | ** ** | ** **         | $ (19) |
| Deduct:  Total stock-based employee     compensation expense determined      under fair value based method for all     awards, net of related tax effects | ** ** | ** ** | ** **         | 115  |
| Pro  forma net loss                                                                                                                                                                                         | ** ** | ** ** | ** **         | $(134) |
|                                                                                                                                                                                                             | ** ** | ** ** | ** **         |  |
| Pro  forma loss per share:                                                                                                                                                                                  | ** ** | ** ** | ** **         |  |
|       Basic  and diluted- as reported                                                                                                                                         | ** ** | ** ** | ** **         | $(0.00) |
|       Basic  and diluted- pro forma                                                                                                                                           | ** ** | ** ** | ** **         | $(0.01) |
|                                                                                                                                                                                                             | ** ** | ** ** | ** **         |  |

** **

**Equity Incentive Plans.**  In 2005, we adoptedthe 2005 Equity Incentive Plan ("2005 Plan") that provides for incentive and/ornon-statutory stock options, stock appreciation rights, restricted stock,restricted stock units, performance shares and units, deferred stock units anddividend equivalents to be granted to our employees, consultants anddirectors.  A total of 800,000 shares are available for issuance under the 2005Plan plus any outstanding options under the Company's 1994 Employee StockOption Plan that subsequently expire unexercised, up to a maximum of 300,000shares.  As of March 31, 2006, only stock options have been granted.  Stockoptions may be granted under the 2005 Plan at an exercise price not less than100% of the fair market value on the date of grant.  Options become exercisableand expire at the times and terms established by the administrator, butgenerally vest over four years and expire five to ten years after the grantdate.  The Company satisfies the exercise of stock options by issuing newshares.  No options were granted or exercised during the three months endedMarch 31, 2006. 

The fair value of each option award is estimatedon the date of grant using the Black-Scholes valuation model based onassumptions for volatility, interest rates, dividend rates, expected timeoutstanding until exercised (expected term) and expected forfeitures made atthe time of the grant.  The requisite service life equals the vesting term,primarily four years.  Expected volatilities are based on daily observations ofthe historical volatility of our common stock over comparable length periodsand other factors.  No adjustment was made in contemplation of the affect offuture events.  We estimate option exercises and employee terminations based onhistorical data for groups of employees that have similar exercise and terminationbehavior (the groups identified are: a. employees, b. officers, and c.directors).  The expected term of options granted is derived by consideringactual historical exercise data and represents the period of time that optionsgranted are expected to be outstanding.  The risk-free interest rate is basedon the U.S Treasury yield curve in effect at the time of the grant.

| 21 |
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**Item1.  Financial Statements (continued)**

** **

**(14)      Stock-basedCompensation (continued)**

Asummary of option activity under the plans for the three months ended March 31,2006 is as follows:

| **Directors**                 | Shares    | Weighted Average  Exercise Price | Weighted Average  Remaining Contractual Term | Aggregate Intrinsic  Value |
|-------------------------------|-----------|----------------------------------|----------------------------------------------|----------------------------|
| Outstanding,  January 1, 2006 | 417  | $8.64                            |                                              |                            |
| Granted                       | --   | --                               |                                              |                            |
| Exercised                     | --   | --                               |                                              |                            |
| Forfeited                     | --   | --                               |                                              |                            |
| Expired                       | (15)      | $4.25                            |                                              |                            |
| Outstanding,  March 31, 2006  | 402  | $8.80                            | 4.9 years                                    | $0                         |
| Options  Exercisable          | 327  | $9.42                            | 4.3 years                                    | $0

                  |

| **Officers**                  | Shares    | Weighted Average  Exercise Price | Weighted Average Remaining  Contractual Term | Aggregate Intrinsic  Value |
|-------------------------------|-----------|----------------------------------|----------------------------------------------|----------------------------|
| Outstanding,  January 1, 2006 | 867  | $7.62                            |                                              |                            |
| Granted                       | --   | --                               |                                              |                            |
| Exercised                     | --   | --                               |                                              |                            |
| Forfeited                     | --   | --                               |                                              |                            |
| Expired                       | (34)      | $3.94                            |                                              |                            |
| Outstanding,  March 31, 2006  | 833  | $7.78                            | 4.5 years                                    | $0                         |
| Options  Exercisable          | 672  | $8.65                            | 4.2 years                                    | $0

                  |

| **Employees**                 | Shares    | Weighted Average  Exercise Price | Weighted Average Remaining  Contractual Term | Aggregate Intrinsic  Value |
|-------------------------------|-----------|----------------------------------|----------------------------------------------|----------------------------|
| Outstanding,  January 1, 2006 | 671  | $5.83                            |                                              |                            |
| Granted                       | --   | --                               |                                              |                            |
| Exercised                     | --   | --                               |                                              |                            |
| Forfeited                     | (7)       | $4.05                            |                                              |                            |
| Expired                       | (26)      | $5.01                            |                                              |                            |
| Outstanding,  March 31, 2006  | 638  | $5.89                            | 4.6 years                                    | $0                         |
| Options  Exercisable          | 445  | $6.74                            | 4.0 years                                    | $0                         |

Asummary of the status of the Company's Nonvested shares as of March 31, 2006and changes during the three months then ended is as follows:

| Nonvested Shares              |  | Shares    |  |  |
|-------------------------------|--|-----------|--|--|
| Nonvested  at January 1, 2006 |  | 492  |  |  |
| Granted                       |  | --   |  |  |
| Vested                        |  | (56)      |  |  |
| Forfeited                     |  | (8)       |  |  |
| Nonvested  at March 31, 2006  |  | 428  |  |  |

| 22 |
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----

**Item1.  Financial Statements (continued)**

** **

**(14)      Stock-basedCompensation (continued)**

As of March 31, 2006, there was approximately $545of total unrecognized compensation expense related to nonvested stock options. This expense is expected to be recognized in the remainder of 2006, 2007, 2008and 2009 in the amounts of $308, $156, $59, and $22, respectively.  The totalfair value of shares vested during the three-month period ended March 31, 2006was $80 plus the value of the ESPP shares vesting of $12.  

**Employee Stock Purchase Plan. **In 2002, we adopted the2002 Employee Stock Purchase Plan that allows eligible employees to purchasedstock at the lower of 85% of the fair market value of the stock on theenrollment date or exercise date as defined by the plan.  Issuances of sharesunder the Employee Stock Purchase Plan occur each six months on June 30 andDecember 31.  Pursuant to the plan, employee purchases are limited to 10% ofannual compensation.  The plan originally had 250 shares reserved forissuance.  In 2004 the shareholders approved an increase in the reserve of 450shares.  The plan is in effect for ten years unless terminated or amendedsooner by the Board of Directors.  At March 31, 2006, 339 shares have beenpurchased under this plan leaving 361 shares available for future issuance. There were no issuances during the three months ended March 31, 2006.  Thevalue of the 15% discount and a pro-rata share of the fair value of the impliedsix-month options is included in the cost of stock-based compensation expensefor the quarter ending March 31, 2006.

**1996 Director Stock Plan.**  The Director StockPlan provides for automatic and discretionary issuances of the Company's commonstock to non-employee directors.  The principle purpose of the Plan is tocompensate the non-employee Directors for their service on the Board. Compensation is paid quarterly in the form of 50% cash and 50% in common stockissued from the Plan's reserve based on the closing market value on the lasttrading day of each fiscal quarter.  Compensation expense for the Board ofDirectors is reflected in General and Administrative expense for all periodspresented.  The total expense is the combination of the cash portion and marketvalue of the stock component on the date of issue.

An initial reserve of 160 shares was approved bythe shareholders in 1996.  As of March 31, 2006, approximately 103 shares remainavailable for issuance.  Further details on the 1996 Director Stock Plan can befound in the Company's Proxy Statement for its 2006 Annual Meeting ofShareholders.  The Plan was originally scheduled to expire in May 2006,however, a vote to extend the Plan for an additional five years will be takenat the 2006 Annual Meeting. 

**(15)     SubsequentEvent**

** **

On May 4, 2006, Tripos completed the sale of 1,800shares of Convertible Preferred Stock at a price of $3.00 per share and issued550 five-year common stock warrants exercisable at $3.50 per share to MidwoodCapital, a Boston-based investment partnership, for gross proceeds of $5,500.  Theshares of Convertible Preferred Stock represent approximately 18 percent ofTripos' outstanding common stock on an as-converted basis (1 preferred share isconvertible into 1 share of common stock).  The Convertible Preferred Stockbears a dividend at an annual rate of 10.5% and is redeemable in two years. Ifcertain events occur prior to January 26, 2007, which events related primarilyto a sale or acquisition of Tripos, the dividends will be accelerated such thatthe holders of the Convertible Preferred Stock will receive dividends in theaggregate amount of $958 (or dividends in the aggregate amount of $1,155 if theevent occurs on or after January 26, 2007) inclusive of any dividends receivedto date.  Net proceeds from this transaction, after the placement agent's feeand estimated legal and other costs, are estimated at $5,000.  This financingstrengthened the Company's balance sheet, enhancing its ability to explorestrategic alternatives and support current and potential business initiatives. 

| 23 |
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**Item 1.  FinancialStatements (continued)**

** **

**(16)     NewAccounting Pronouncements**

In February 2006, the FASB issued SFAS No. 155 "Accounting for Certain Hybrid Financial Instruments-an amendment of FASBStatements No. 133 and 140" ("FAS 155").  FAS 155 addresses the following:a) permits fair value remeasurement for any hybrid financial instrument thatcontains an embedded derivative that otherwise would require bifurcation; b) clarifieswhich interest-only strips and principal-only strips are not subject to therequirements of Statement 133; c) establishes a requirement to evaluateinterests in securitized financial assets to identify interests that arefreestanding derivatives or that are hybrid financial instruments that containan embedded derivative requiring bifurcation; d) clarifies that concentrationsof credit risk in the form of subordination are not embedded derivatives; ande) amends Statement 140 to eliminate the prohibition on a qualifyingspecial-purpose entity from holding a derivative financial instrument thatpertains to a beneficial interest other than another derivative financialinstrument. FAS 155 is effective for all financial instruments acquired or issuedafter the beginning of an entity's first fiscal year that begins afterSeptember 15, 2006.  We are currently evaluating the requirements of FAS 155,but do not expect that the adoption will have a material effect on ourfinancial statements. 

** **

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

**Forward-lookingStatements**

The remainder of this report may contain certainstatements that are forward-looking and involve risks and uncertainties.  Wordssuch as "expects", "anticipates", "projects","estimates", "intends", "plans","believes", variations of such words and similar expressions areintended to identify such forward looking statements.  These statements arebased on current expectations and projections made by management and are notguarantees of future performance.  Therefore, actual events, outcomes andresults may differ materially from what is expressed or forecast in suchforward-looking statements.  Among the factors that could cause actual resultsto differ materially from the forward-looking statements are set forth underthe caption "Risk Factors" in Part 1A of Tripos' Form 10*-*K for 2005. Tripos undertakes no obligation to update any forward-looking statements inthis Form 10-Q.

The following discussion should be read inconjunction with the audited consolidated financial statements and notesthereto.

** **

**Overview**

** **

We provide products andservices to the pharmaceutical, biotechnology, and life science industries tosupport early stage research activities.  Our offerings are applied principallyto assist research chemists to make decisions about the most productive newcompounds to make and test as potential therapeutics.  Through our own chemistrylaboratories, we can also make those compounds for our clients.  Throughstrategic partnerships, we can also participate more directly with our clientsin the development and testing of new therapeutic compounds for our clients.

The industries that weserve are highly research driven.  Mature pharmaceutical companies typicallyspend up to 20% of their annual revenues on research to find new blockbusterdrugs.  This research process consists of several phases from early discoveryof compounds of interest, through testing of the promising ones for activityand safety in animals, to final testing of these compounds in humans.  Theinvestment in research activity increases dramatically in the second and thirdphases.  Tripos' offerings 

| 24 |
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**Item 2.  Management'sDiscussion and Analysis of Financial Condition and Results of Operations(continued)**

are most relevant to theinitial phase of this activity, namely discovery of compounds.  Our productsand services are designed and intended to provide our pharmaceutical andbiotechnology customers with improved ways to identify and select the mostpromising drug candidates to take forward into the more expensive and timeconsuming stages of the drug development process.   Depending on the number ofcompounds that a particular company has in different stages of their newtherapeutic pipeline, they may reduce or increase investment in the otherphases of research.  Further, decisions by the pharmaceutical industryconcerning their research investments are strongly influenced by decisions bythe various governments of the world regarding drug pricing and regulation.

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

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

Having been a publiccompany spinout in 1994 with limited capital, we have focused on profitabilityand cashflow.  That said, we have not always been profitable, but have achievedprofitability in certain years.  Major investments, such as the recentexpansion of our chemistry research laboratories in England, have been fundedby other successful investments (e.g. Arena Pharmaceuticals), cash fromoperations, temporary use of debt capacity, and grant funding.

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

**Perpetual licenses:**

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

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

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

**Bundled licenses:**

Time-based bundledlicenses are an alternative to perpetual licenses.  This type of license allowsour customers to obtain multiple software products bundled with PCS that isco-terminus with the period of the arrangement.  A bundled license includesspecific software modules and specified numbers of users of each module withall product and access keys delivered on or before the effective date of thecontract.  Tripos software is sold to professional users on an "off theshelf" basis in which the customer is responsible for installation.  Thesenon-cancelable, non-refundable contracts are normally three years in durationalthough certain customers request shorter or longer contract periods.  At theend of the contract term, the customer must renew the license, or the softwarewill cease to operate.  PCS, which includes unspecified updates, upgrades, and"help desk" services, is included in the total price of thecontract.  The PCS provided under bundled arrangements is the same as thatprovided to customers under perpetual agreements.  Bundled contract pricing istaken from our established price list (includes package pricing and a-la-cartpricing) that is based on the number of users and length of term.  Allcontracted products are delivered at inception.  If the customer should wantadditional modules, users, or license to any new software products, thecustomer must enter a new contract (or addendum) and pay the incremental feesto purchase these items.  Software revenue and PCS revenues under bundledlicense agreements are recognized ratably over the contract period.

**Term licenses:**

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

Our integration ofchemistry and biological data in the life sciences industries creates a revenueopportunity for discovery informatics services (software consulting).  To servethis market, we maintain a staff of specialists who use our proprietary data integrationframework, such as FormsBuilder, SMART-IDEA, Benchware Notebook, ChemCoreRIOand AUSPYXTM to configure customized solutions for data management. Revenue may be generated on a billable rate per day, or upon achievement ofmilestones or deliverables and is recognized as production activities areperformed.  These contracts may also generate substantial license fee revenuefor our proprietary software technologies.  Similarly to our discoveryinformatics products, licensing levels are dependent on the number of users andsites and may range from the low hundred-thousands up to million dollar levels.

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

We develop andmanufacture general screening compound libraries for sale to the life sciencesindustry for a fee per compound delivered.  In addition we offer ourLeadDiscovery libraries which include higher value intellectual property rights(such as patent applications).  These compounds and libraries have created theopportunity to offer follow-up discovery research methods to customers fordesign and synthesis of focused libraries for lead optimization.  We alsomarket a comprehensive research process to our life sciences customers forrapid and cost effective discovery.  This process combines advancedinformatics, chemistry, and biology products and services, with proprietarydiscovery technologies for efficient lead development, refinement, andoptimization resulting in a tightly integrated process to facilitate synergiesin drug discovery. 

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

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

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

Our revenues andexpenses vary from quarter to quarter depending upon, among other things, thetiming of customers' budget processes, the success of our sales efforts, thelengthy sales cycle and our ability to influence customers and prospectivecustomers to make decisions to outsource portions of their discovery process,the size of the customers' capital expenditure budgets, the ability to producecompound libraries and achieve product release schedules (including by Tripos'third party software providers and collaborators) in a timely manner, the rateof market acceptance of new products and enhanced versions of existing products,the timing of new product introductions by us and other vendors, changes inlicensing and pricing policies (ours, our partners and that of other vendors),consolidation in the customer base, client involvement in decision points incontracts related to project plans, our ability to accurately match contractcosts to milestone or contract performance requirements on our largercollaborative arrangements, and changes in general economic, regulatory, andcompetitive conditions.  See Note 1 of the Notes to Consolidated FinancialStatements for a discussion of revenue recognition policies.  Because muchof our software license and PCS revenue along with our contracted discoveryresearch revenue is recognized ratably over multiple periods, fluctuations inour quarterly revenues and earnings are caused principally by sales of compoundsor by achievement of milestones on specific

|  27 |
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**Item 2.  Management'sDiscussion and Analysis of Financial Condition and Results of Operations(continued)**

projects. Our management team monitors quarterly business activity with the aid of salespipeline reports and monthly financial reports.

** **

**Resultsof Operations**(Amountsin thousands, except per share amounts)

**Net sales** for the first quarter of 2006 were $8,470compared to $15,043 in 2005, a decrease of 44%.  Discovery informaticsproducts and support sales decreased 6% to $5,883 in 2006 from $6,263 for sameperiod in 2005.  This decrease is primarily attributable to customer contractsthat were not renewed due to a variety of reasons including changing customerneeds and client financial resources.  Discovery informatics services revenuesfor the first quarter of 2006 increased 18% to $789 from $668 in the firstquarter of 2005.  The increase was attributable to revenues related to progresson the Wyeth informatics contract exceeding the milestone recorded in the prioryear on the Schering contract.  The timing of revenue recognition fromdiscovery informatics services may fluctuate based on achievement ofcontractual milestones.  Discovery research sales accounted for $1,781 in thefirst quarter of 2006 and $8,102 in the same period in 2005, a decrease of $6,321or 78%.  This decrease in discovery research business was almost entirely attributableto the completion of our four-year $90 million strategic compound fileenrichment and hit follow-up contract with Pfizer, Inc. in the fourth quarterof 2005.  Revenues from Pfizer in the first quarter 2005 were $6,420.  Hardwaresales for the first quarter 2006 were $17 compared to $10 for the first quarter2005.  We do not actively market hardware products, but rather facilitatecustomer demand when required.

Net sales for the Company's activities outsideof North America represented approximately 49% and 80% for the three-monthperiods ending March 31, 2006 and 2005, respectively.  North American net salesaccounted for 51% of 2006 and 20% of 2005 total first quarter sales.  Net salesin Europe decreased $7,672 or 69% to $3,469 for the first quarter of 2006compared to 2005, and accounted for 41% and 74%, respectively, of total sales. This decrease in Europe is principally related to revenues included in 2005related to progress on the Pfizer strategic compound design and synthesisproject that was contracted through our U.K. office and completed in the fourthquarter 2005.  Net sales in the Pacific Rim decreased by 18% for the firstquarter of 2006 compared to the same period in 2005.  The decrease was drivenprimarily by lower Discovery Research compound sales in 2006 versus 2005.  The Pacific Rim accounted for 8% and 6% of net sales for the three-month periods in 2006 and2005, respectively.

**Cost of sales** for the three-month period ending March31, 2006 decreased by $4,340 or 55% to $3,567 compared to $7,907 for the sameperiod in 2005.  Cost of sales as a percent of net sales was 42% and 53% forthe three-month periods in 2006 and 2005, respectively.  Included in the 2005cost of sales was $4,724 related to the Pfizer contract.  The 2006 cost ofsales number includes approximately $182 of incremental amortization expenserelated to capitalized software development costs for products that werereleased to the market in the third quarter of 2005.

**Gross profit** margin for the first quarter 2006 increasedto 58% of total net sales versus 47% in the first quarter of 2005, primarilydue to a shift in business such that Discovery Informatics now represents alarger percentage of business with higher margins compared to the first quarterof 2005.  This higher percentage of Discovery Informatics business is a resultof our completion of the Discovery Research four-year $90 million strategic compound fileenrichment and hit follow-up contract with Pfizer, Inc. in the fourth quarterof 2005.  Gross profit margin related to Discovery Informatics products andsupport declined to 77% in 2006 versus 81% in 2005 due to lower revenues andcomparable cost of sales levels.  

| 28 |
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**Item 2.  Management'sDiscussion and Analysis of Financial Condition and Results of Operations(continued)**

Gross profit margin improved in DiscoveryInformatics Services compared to the prior year as the majority of the discoveryinformatics service revenues in the first quarter of 2005 were attributable tothe Schering contract at zero margin.  We did not recognize gross margin on theSchering informatics consulting contract until the project was completed inlate 2005 due to its historical losses.  Discovery Research gross profit marginon non-Pfizer business declined in the current year, primarily due to acomplicated chemistry contract that operated at a loss in the period inaddition to a three-party contract that generated zero margin to Tripos in theperiod.  Gross profit for the company is also dependent on costs of chemicalmaterials and overhead, the mix of internal versus third-party software productsales, foreign exchange rates and the company's ability to successfully deliveron informatics contracts.

**Sales and marketing** expenses increased 2%to $3,010 for the first quarter of 2006 from $2,945 in the same period in 2005. Sales and marketing expenses as a percentage of net sales were 36% and 20% for thethree-month periods in 2006 and 2005, respectively.  The increase in sales andmarketing spending was attributable to the addition of 3 employees this quarterversus the year-ago quarter plus relocation costs.  The increase as apercentage of total revenues is primarily due to overall lower sales (postPfizer) and the fact that the majority of sales and marketing expenses are directedtoward discovery informatics while a significant decrease occurred in DiscoveryResearch revenues.

**Research and development**expenses increased by $901or 47% to $2,822 from $1,921 and represented 33% and 13% of net sales for thethree-month periods in 2006 and 2005, respectively.  The increase in quarterlyR&D expense year-over-year was primarily attributable to a decrease in capitalizationof costs for development related to discovery informatics products along with inefficienciesand redundant staff at our discovery research facility during the statutory consultationperiod leading to the reduction in force.  In December 2005 we announced that we hadinitiated a 30 day consultation period as mandated by UK law to complete areduction in force for our Discovery Research business based in Bude, England. We initiated this action to streamline our Discovery Research business andassociated cost structure as a result of our successful completion of thefour-year $90 million file enrichment project with Pfizer in the fourth quarterof 2005.  We completed this process in January 2006, reducing our workforce by76 positions.  Reorganization and reassignment of chemistry staff werefinalized during February leading to more normal production efficiencies inMarch 2006. As a resultof the adoption of Statement of Financial Accounting Standards("SFAS") No. 151 "Inventory Costs-an amendment of ARB No. 43,Chapter 4" ("FAS 151"), there are more current period charges ofapproximately $275 in the first quarter of 2006 and we are estimatingapproximately $975 for fiscal year 2006 based upon decreased production.  FAS151 clarifies the accounting for abnormal amounts of idle facility expense,freight, handling costs, and wasted material (spoilage) to require that theseitems be included as current-period charges and not included in inventory. 

In 2006 we capitalized $235 related to onediscovery informatics software product versus $599 in 2005 for six softwareproducts.  

**General and administrative**expenses decreased $127or 6% to $1,838 in 2006 from $1,965 for the first quarter of 2005, andrepresent 22% and 13% of net sales for the corresponding periods.  The reducedG&A expense for 2006 is a result of reduced staff, lower public companycosts and lower legal defense costs now that we have met our deductible.

**Stock-Based  Compensation**  expense is included each area of expense (Selling and Marketing, Research and  Development, and General and Administrative) in the first quarter of 2006.   The total of $92 is now required under FAS 123R.  Prior year amounts werereflected on a pro-forma basis in the footnotes to the

|  29 |
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**Item 2.  Management's Discussion and Analysis ofFinancial Condition and Results of Operations (Continued)**

financial statements.  See Note 14 for a furtherdiscussion of the prior year amounts and stock-based compensation accountingtreatment. 

**Restructuring charge**in the first quarter of2006 represents the January 24, 2006 completion of a reduction in force for our DiscoveryResearch business based in Bude, England that was initiated in December 2005 followingcompletion of the four-year****$90 million file enrichment project for Pfizer.  This action coincided with the conclusion of the 30-dayconsultation period with employees mandated by U.K. law.  We reduced the numberof employees at the laboratory by 76 positions.  More than half of theemployees affected left the Company under a voluntary separation plan.  Inaddition, a restructuring of our US based employees resulted in a reduction of9 positions.  As a result of these actions, the Company recorded pre-taxrestructuring charges of approximately $807 and $120 in the first quarter 2006 relatedto our Discovery Research and Discovery Informatics divisions, respectively,for one-time termination benefits and outplacement costs.  Of the $927 chargereflected in the statement of operations, $10 remains to be paid in the secondquarter 2006.  The annualized effect of the downsizing is estimated to resultin a cash savings from payroll and related benefits of $2,400.  This amountwould have been distributed as follows:  $250 in Selling and Marketing; $1,790in Research and Development; and $360 in General and Administrative.  Certaindepartments within R&D would have qualified for absorption into inventoryand ultimately reduced through cost of sales.  Other variable costs related toproduction are not estimable at this time.

**Interest expense**increased to $501 in thefirst quarter in 2006 from $388 in the same period in 2005, due to increasedinterest rates on our revolving line of credit and mortgage note, the additionof 2 new capital leases in the first quarter 2006, and additional amortizationof the debt discount that arose from the funding of the Optive Researchacquisition in early 2005. 

**Other income**was $291 in 2006 versusa loss of $(7) in 2005.  Included in 2006 is $251 related to currency gains,$25 of interest income and a $16 adjustment to our carrying value in the AMPappas Life Science II Fund to reflect our current pro-rata share and thecurrent valuation by the fund's managers.  The 2005 loss resulted from acurrency loss of $128 and recording of an unrealized loss of $88 on ourpro-rata share of an investment held in the A.M. Pappas Life Science II fund. Offsetting these losses was a gain of $182 from the sale of shares of NuVasive,Inc. and interest income of $28.****

** **

**Income tax** benefit was $218 for the firstthree-months of 2006 compared to $71 for the same period in 2005, which representeffective tax rates of 6% and 79%, respectively.  The 6% effective tax rate for2006 reflects management's current estimate of the distribution of earningsamong the statutory jurisdictions in which we operate, realization of R&Dtax credits in the U.K. and the valuation of certain net operating loss carry forwards.

** **

**Liquidity,Capital Resources and Capital Commitments**

Net cash used in operations in 2006 was $84.  Theprimary uses of cash were from a net loss of $3,686, increases in inventories of$530, increases in prepaid expenses and other current assets of $336, reductionsin accounts payable and accrued expenses of $1,207 along with lower deferredrevenues of $1,228.  These uses of cash were partially offset bycollections of accounts receivable of $5,422 plus the add-back of non-cashdepreciation and amortization, including the amortization of debt discount,totaling $1,391, along with the add-back of non-cash stock-based compensationexpense of $92.  The increase in inventory is primarily related to on-goingcustomer contracts.  The drop in accounts receivable reflects thecollection of the seasonally higher balances outstanding at the end of the prioryear.  Reductions in

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**Item 2.  Management's Discussion and Analysis ofFinancial Condition and Results of Operations (Continued)**

deferred revenue reflect the ratable recognitionof revenue in the quarter and the cyclicality of software contract renewals. Payments on accounts payable and accrued expenses also reflect the higherseasonal year-end balances.  Net cash provided by operations in 2005 was $1,753. The primary sources of cash were from reductions in accounts receivable of$5,565, reductions in inventory of $1,348 plus the add-back of non-cashdepreciation and amortization, including the amortization of debt discount,totaling $1,522.  These sources of cash were partially offset by payments ofaccounts payable and accrued expenses of $3,049 along with additions to prepaidexpenses of $1,618 with a reduction in deferred revenue of $1,675.

Cash provided by investing activities during 2006totaled $2,594, consisting of proceeds from the sale of equipment of $2,941,partially offset by property and equipment acquisitions of $112 and capitalizeddevelopment costs for our discovery informatics software products of $235.  Cashused in investing activities during 2005 totaled $6,224 and were for propertyand equipment acquisitions of $1,076, capitalized development costs for ourdiscovery informatics software products of $599, investment in the A.M. PappasLife Science II fund of $125 and the cash used in the acquisition of OptiveResearch, Inc. of $4,762.  These were partially offset by $338 of grossproceeds from the sale of NuVasive shares.  Over the next 12 to 18 months of2006-2007, we may be asked to fund the remainder of our investment commitment($425) to the A.M. Pappas Life Science II Fund.  

For 2006, cash used in financing activities was$3,287.  Cash payments on long-term debt and capital lease obligations totaled$4,687.  This was partially offset by borrowings under our revolving line ofcredit of $1,400.  For 2005, $5,049 of cash was generated through financingactivities from the issuance of common stock of $500 and subordinated debt of$3,500 to fund part of the acquisition of Optive Research.  We had a netincrease in outstanding borrowings on our line of credit with LaSalle Bank of$1,900 while making payments on our mortgage and capital leases of $851. 

** **OnApril 18, 2006, the Company and LaSalle Bank completed an amendment to theexisting credit facility and mortgage loan.  The term of the revolving line ofcredit was extended to January 1, 2007 and the line of credit was amended to$6,000.  The amended line of credit will have a borrowing base equal to 80% ofdomestic and insured foreign accounts receivable plus $1.8 million allowance forthe excess equity in U.S. real estate, a revised minimum shareholders' equitycovenant tested quarterly and a minimum consolidated cash balance covenanttested monthly.  The annual clean-down requirement was eliminated.  Interest onthe mortgage loan was modified to LIBOR plus 3.0%.  All other terms of therevolving line of credit remain the same.

On May 4, 2006, the Company completed the saleof 1.8 million shares of ConvertiblePreferred Stock at a price of $3.00 per share and issued 550,000 five-yearcommon stock warrants exercisable at $3.50 per share to Midwood Capital, aBoston-based investment partnership, for gross proceeds of $5,500.  The sharesof Convertible Preferred Stock represent approximately 18% of Tripos'outstanding common stock on an as-converted basis.  The Convertible PreferredStock bears a dividend at an annual rate of 10.5% and is redeemable in twoyears. If certain events occur prior to January 26,2007, which events relatedprimarily to a sale or acquisition of Tripos, the dividends will be acceleratedsuch that the holders of the Convertible Preferred Stock will receive dividendsin the aggregate amount of $958 (or dividends in the aggregate amount of $1,155if the event occurs on or after January 26, 2007) inclusive of any dividendsreceived to date.  Net proceeds from this transaction, after the placementagent's fee and estimated legal and other costs, are estimated at $5,000.  Thisfinancing strengthened the Company's balance sheet, enhancing its ability toexplore strategic alternatives and support current and potential businessinitiatives. 

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**Item 2.  Management's Discussion and Analysis ofFinancial Condition and Results of Operations (Continued)**

```
 
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We expect to fund prospective operating needs and capital expenditures through cash from operations and other resources that become available to us.  We believe that we will be able to satisfy our liquidity and capital expenditure requirements for at least the next twelve months from the following sources:   cash, accounts receivable balances, projected cash flows from operations, access to available borrowings from LaSalle Bank, the proceeds from the sale of Convertible Preferred Stock and incremental capital leases, if any.  Also, we intend to seek a further extension of the LaSalle Bank facility prior to its expiration.  Although we have taken steps intended to better align our operating costs to our expected revenues as a result of the completion of our four year Pfizer contract, our working capital could be adversely affected if we are not entirely successful in these efforts.  However, we expect that our capital expenditure requirements will be substantially lower than in recent years due to the completion of our chemistry laboratory expansion.  See Note 8 of the Notes to Consolidated Financial Statements for a discussion of our credit facilities.

Although we have no current plans to do so, fromtime to time in the future we may determine to further enhance our capitalresources.  In making decisions regarding access to additional capital, wewould consider the availability and terms of financing alternatives, and theexpected financial impact of any financing, including any near-term dilutiveimpact, that we might incur in pursuit of our objective to maintain financialflexibility to support planned and opportunistic growth of our business and theongoing consideration of our strategic objectives.  Additional capital may bein the form of equity or debt securities, and may be raised in public offeringor private placement transactions.  

** **

**Critical Accounting Policies**

For further discussionof the Company's critical accounting policies, please see the section entitled"Critical Accounting Policies" in Management's Discussion andAnalysis of Financial Condition and Results of Operations in Form 10-K for theyear ending December 31, 2005.   With the adoption of FAS 123R at thebeginning of fiscal 2006, we have determined that "Stock-Based Compensation" should be included asone of the Company's identified critical accounting policies. We account forstock-based compensation in accordance with the provisions of SFAS 123R. We use the Black-Scholes option-pricing model, which requires the input ofhighly subjective assumptions.  These assumptions include estimating thelength of time employees will retain their stock options before exercising them("expected term"), the estimated volatility of the Company's common stock priceover the expected term and the number of options that will ultimately notcomplete their vesting requirements ("forfeitures").  Changes in the subjectiveassumptions can materially affect the estimated fair value of stock-basedcompensation and consequently, the related amount recognized on theconsolidated statements of operations.  See Note 14 of the Notes toConsolidated Financial Statements in this Form 10-Q for further discussion ofstock-based compensation.  There have been no material changes to the othercritical accounting policies previously reported in our Annual Report on Form10-K for the fiscal year ended December31, 2005.

**New Accounting Pronouncements**

 

In  February 2006, the FASB issued SFAS No. 155 "Accounting for Certain Hybrid  Financial Instruments-an amendment of FASB Statements No. 133 and 140" ("FAS  155").  FAS 155 addresses the following: a) permits  fair value remeasurement for any hybrid financial instrument that contains anembedded derivative that otherwise would require bifurcation; b) clarifies whichinterest-only strips and principal-only strips are not subject to therequirements of Statement 133; c) establishes a requirement to evaluateinterests in securitized financial assets to identify interests that arefreestanding derivatives or

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**Item 2.  Management's Discussion and Analysis ofFinancial Condition and Results of Operations (Continued)**

that are hybrid financialinstruments that contain an embedded derivative requiring bifurcation; d)clarifies that concentrations of credit risk in the form of subordination arenot embedded derivatives; and e) amends Statement 140 to eliminate theprohibition on a qualifying special-purpose entity from holding a derivativefinancial instrument that pertains to a beneficial interest other than anotherderivative financial instrument. FAS 155 is effective for all financialinstruments acquired or issued after the beginning of an entity's first fiscalyear that begins after September 15, 2006.  We are currently evaluating therequirements of FAS 155, but do not expect that the adoption will have amaterial effect on our financial statements. 

** **

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

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

Our exposure to marketrisks is limited to foreign exchange variances and fluctuations in interestrates.  To date, interest rate exposure has not resulted in a material impact.  During 2003, 2004 and 2005, the Company did experience a significant impactfrom foreign exchange.  The costs to perform the custom design and synthesiscontract with Pfizer are incurred in British pounds sterling while we arecompensated in U.S. dollars for much of the work.  As a result, our grossprofit was adversely affected by the decline in the U.S. dollar against thepound.  Part of this effect was offset through foreign currency forwardcontracts whose gains were recorded in "Other Income".

Our foreign exchangerisk is presently limited to currencies that historically have exhibited onlyminor fluctuations although from 2003 through 2005, these currencies have shownmore significant variation.  Assets outside the United States subject to currencyfluctuation are located in England, Germany and France.  Our investments inforeign subsidiaries with a functional currency other than the U.S. dollar arenot hedged.  The assets in foreign subsidiaries most susceptible to exchangerate variances were as follows:  US dollar/UK pound balances 2005 $13.0million, and US dollar/Euro balances 2005 $3.0 million.  The potentialreduction in fair value resulting from a hypothetical 10% adverse change in USdollar/UK pound currency exchange rates would be approximately $1.3 million atDecember 31, 2005, while the same 10% adverse movement in the US dollar/Eurorates would be approximately, $300,000 for 2005.  Any loss in fair value ofpermanently invested funds would be reflected in Other Comprehensive Income andwould not impact our net income. 

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

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**Item 4.  Controls and Procedures**

We have established andmaintain disclosure controls and procedures that are designed to ensure thatmaterial information relating to the Company and our subsidiaries required tobe disclosed by us in the reports that we file or submit under the SecuritiesExchange Act of 1934 is recorded, processed, summarized, and reported withinthe time periods specified in the SEC's rules and forms, and that suchinformation is accumulated and communicated to our management, including ourChief Executive Officer and Chief Financial Officer, as appropriate to allowtimely decisions regarding required disclosure.  In designing andevaluating the disclosure controls and procedures, management recognized thatany controls and procedures, no matter how well designed and operated, canprovide only a reasonable assurance of achieving the desired controlobjectives, and management was necessarily required to apply its judgment inevaluating the cost-benefit relationship of possible controls andprocedures.  

The Company's ChiefExecutive Officer and Chief Financial Officer have evaluated the effectivenessof the design and operation of the Company's disclosure controls and procedures(as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Actof 1934, as amended) as of the end of the period covered by this report. Basedupon that evaluation, the Company's Chief Executive Officer and Chief FinancialOfficer have concluded that the Company's disclosure controls and procedures wereeffective at the reasonable assurance level as of the date of such evaluation. In our 2005 Form 10-K, the Company disclosed a material weakness over financialreporting related to exchange transaction gains/losses on certain intercompanybalances caused by a spreadsheet error.  Management has determined that theCompany has eliminated this material weakness in internal control over financialreporting through a series of remedial actions undertaken since the discoveryof the material weakness.  These remedial actions include performing additionalrecalculations and reconciliations of foreign exchange transaction gains/losseson the intercompany balances and ending other comprehensive income balance,reconfirmation of intercompany settlements related to these balances andrectifying the errors within the consolidating spreadsheet application.  

During the quarterlyperiod covered by this report, there were no other changes in the Company'sinternal control over financial reporting that have materially affected, or arereasonably likely to materially affect, the Company's internal control overfinancial reporting.

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**PART II**

**OTHER INFORMATION**

Item 1.     LegalProceedings

          Noupdates.  See "Contingent Liabilities" in the Notes to Unaudited FinancialStatements above for a general description.  Reference is made to the "LegalProceedings" section of our Form 10-K for the year ending December 31, 2005 fora detailed description of legal proceedings.

** **

Item 1A.   Risk Factors

          Adescription of the risk factors associated with our business is contained inItem 1A, "Risk Factors," of our 2005 Annual Report on Form 10-K filed with theSecurities and Exchange Commission on April 11, 2006 and incorporated herein byreference.  These cautionary statements are to be used as a reference inconnection with any forward-looking statements.  The factors, risks anduncertainties identified in these cautionary statements are in addition tothose contained in any other cautionary statements, written or oral, which maybe made or otherwise addressed in connection with a forward-looking statementor contained in any of our subsequent filings with the Securities and ExchangeCommission.

Item2.     Unregistered Sales of Equity Securities and Useof Proceeds

          None

Item3.     Defaults upon Senior Securities

          None

Item4.     Submission of Matters to a Vote of SecurityHolders

None

Item5.     Other Information

          None

Item6.     Exhibits 

3.1      Amendedand Restated Articles of Incorporation dated February 25, 1994  

3.2      Articlesof Amendment (creating Series A Preferred Stock) dated January 26, 1996

3.3      Articlesof Amendment (creating Series C Preferred Stock) dated May 2, 2006

10.21  Fifth Amendment to the Amendedand Restated Loan Agreement with LaSalle Bank, N.A. dated April 18, 2006

           31.1    Section302 Certification of the Chief Executive Officer

           31.2    Section302 Certification of the Chief Financial Officer

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

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**TRIPOS, INC.**

**SIGNATURES**

** **

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned hereunto duly authorized.

TRIPOS, INC.

| Date: | May 15, 2006 | /s/  John P. McAlister                |
|-------|--------------|---------------------------------------|
|       |              | President and                         |
|       |              | Chief Executive Officer               |
|       |              |                                       |
| Date: | May 15, 2006 | /s/ B. James Rubin                    |
|       |              | Senior Vice President,                |
|       |              | Chief Financial Officer and Secretary |
|       |              |                                       |
| Date: | May 15, 2006 | /s/ John D. Yingling                  |
|       |              | Vice President,                       |
|       |              | Chief Accounting Officer and          |
|       |              | Assistant Secretary                   |

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