FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549



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

SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended June 30, 2001



Commission File Number 0-23666



TRIPOS, INC.

(Exact Name of Registrant as Specified in its Charter)



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

1699 South Hanley Road

St. Louis, Missouri 63144

(Address of Principal Executive Offices and Zip Code)



(314) 647-1099

(Registrant's Telephone Number, Including Area Code)







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

YesX     No

Number of shares outstanding of the issuer's Common Stock, par value $.01 per share, as of June 30, 2001:7,421,771 shares.







TABLE OF CONTENTS



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



PART I

FINANCIAL INFORMATION

Item 1. Financial Statements.

CONSOLIDATED BALANCE SHEETS



|(In thousands)                                         | 06-30-2001  | 12-31-2000
|------------------------------------------------------ | ----------- | ----------
|ASSETS                                                 | (Unaudited) |           
|Current Assets:                                        |             |           
|Cash and cash equivalents                              | $ 8,730     | $ 3,806   
|Marketable Securities                                  | 32,496      | 13,576    
|Accounts receivable                                    | 11,457      | 15,531    
|Inventory                                              | 4,393       | 4,345     
|Prepaid expenses                                       | 1,485       | 1,452     
|Total current assets                                   | 58,561      | 38,710    
|                                                       |             |           
|Notes Receivable-trade                                 | 2,909       | 2,063     
|Deferred income taxes                                  | 118         | 118       
|Property and equipment, less accumulated depreciation  | 12,598      | 12,826    
|Capitalized development costs, net                     | 260         | 327       
|Goodwill, net of amortization                          | 1,003       | 1,023     
|Investment in restricted stock                         | 2,072       | 1,931     
|Other, net                                             | 164         | 188       
|Total assets                                           | $77,685     | $57,186   
|                                                       |             |           
|LIABILITIES AND SHAREHOLDERS' EQUITY                  
|Current Liabilities:                                   |             |           
|Current portion of long-term debt and capital leases   | $ 743       | $ 3,949   
|Accounts payable                                       | 1,143       | 1,423     
|Accrued expenses                                       | 4,895       | 3,240     
|Deferred revenue                                       | 5,893       | 8,679     
|Deferred income taxes                                  | 11,306      | 4,297     
|Total current liabilities                              | 23,980      | 21,588    
|                                                       |             |           
|Long-term portion of long-term debt and capital leases | 2,920       | 314       
|Long-term deferred revenue                             | 2,056       | 1,951     
|Series-B preferred stock                               | 9,599       | 9,376     
|                                                       |             |           
|Shareholders' equity :                                 |             |           
|Common stock                                           | 37          | 36        
|Additional paid-in capital                             | 21,289      | 20,023    
|Retained earnings (deficit)                            | (693)       | (3,480)   
|Other comprehensive income                             | 18,497      | 7,378     
|Total shareholders' equity                             | 39,130      | 23,957    
|                                                       |             |           
|Total liabilities and shareholders' equity             | $77,685     | $57,186   
|                                                       |             |           

See accompanying notes.



Item 1. Financial Statements (continued)



CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

|                                                          | Three Months Ended |            | Six Months Ended
|--------------------------------------------------------- | ------------------ | ---------- | ----------------
|                                                          | 06-30-2001         | 06-30-2000 |                 
|Net sales:                                                |                    |            |                 
|Software licenses                                         | $3,449             | $2,598     |                 
|Support                                                   | 1,957              | 1,888      |                 
|Software consulting services                              | 2,997              | 76         |                 
|Discovery services                                        | 1,148              | 688        |                 
|Hardware                                                  | 1,035              | 226        |                 
|Total net sales                                           | 10,586             | 5,476      |                 
|                                                          |                    |            |                 
|Cost of sales                                             | 1,781              | 749        |                 
|Gross margin                                              | 8,805              | 4,727      |                 
|                                                          |                    |            |                 
|Operating expenses:                                       |                    |            |                 
|Sales and marketing                                       | 2,602              | 2,541      |                 
|Research and development                                  | 3,640              | 2,292      |                 
|General and administrative                                | 1,503              | 1,249      |                 
|Total operating expenses                                  | 7,745              | 6,082      |                 
|                                                          |                    |            |                 
|Income (loss) from operations                             | 1,060              | (1,355)    |                 
|                                                          |                    |            |                 
|Other income, net                                         | 2,444              | 96         |                 
|Income (loss) before income taxes
and preferred dividends | 3,504              | (1,259)    |                 
|                                                          |                    |            |                 
|Income tax expense (benefit)                              | 1,226              | --         |                 
|Net income (loss)                                         | 2,278              | (1,259)    |                 
|                                                          |                    |            |                 
|Preferred dividends                                       | 112                | 113        |                 
|Net income (loss) allocable to common shareholders        | $2,166             | $(1,372)   |                 
|                                                          |                    |            |                 
|Basic income (loss) per share                             | $0.30              | $(0.20)    |                 
|Basic weighted average number of shares                   | 7,310              | 6,992      |                 
|Diluted income (loss) per share                           | $0.25              | $(0.20)    |                 
|Diluted weighted average number of shares                 | 9,228              | 6,992      |                 
|                                                          |                    |            |                 

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

See accompanying notes.



Item 1. Financial Statements (continued)

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

|                                                                                         | Six Months Ended
|---------------------------------------------------------------------------------------- | ----------------
|                                                                                         | 06-30-2001      
|Operating activities:                                                                    |                 
|Net income (loss)                                                                        | $ 3,010         
|Adjustments to reconcile net income (loss) to
net cash provided by operating activities: |                 
|Depreciation of property and equipment                                                   | 942             
|Amortization of capitalized development costs and goodwill                               | 114             
|                                                                                         |                 
|Change in operating assets and liabilities:                                              |                 
|Accounts receivable                                                                      | 3,674           
|Notes receivable-trade                                                                   | (880)           
|Inventories                                                                              | (226)           
|Prepaid expenses and other current assets                                                | (221)           
|Accounts payable and accrued expenses                                                    | 1,611           
|Deferred revenue                                                                         | (2,199)         
|Net cash provided (used) by operating activities                                         | 5,845           
|                                                                                         |                 
|Investing activities:                                                                    |                 
|Notes receivable-other                                                                   | --              
|Purchases of property and equipment                                                      | (1,260)         
|Capitalized development costs                                                            | --              
|Acquisition, including investment in unconsolidated affiliates                           | (525)           
|Net cash used in investing activities                                                    | (1,785)         
|                                                                                         |                 
|Financing activities:                                                                    |                 
|Stock issuance pursuant to stock plans                                                   | 1,267           
|Proceeds from issuance of Series B preferred stock                                       | --              
|Payments on long-term debt and capital leases                                            | (398)           
|Net cash provided by financing activities                                                | 869             
|                                                                                         |                 
|Effect of foreign exchange rate changes on
cash and cash equivalents                     | (5)             
|                                                                                         |                 
|Net increase in cash and cash equivalents                                                | 4,924           
|                                                                                         |                 
|Cash and cash equivalents at beginning of period                                         | 3,806           
|Cash and cash equivalents at end of period                                               | $ 8,730         

See accompanying notes.



Item 1. Financial Statements (continued)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)



(1)     Summary of significant accounting policies

Organization

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

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

Our customers, a number of which are industry leaders, use our products and services to reduce product discovery costs and time, and to accelerate the development of major new products. To date, Tripos has entered into strategic alliances with pharmaceutical and biotechnology companies. Certain of these contracts provide for recurring payments for products and services over the course of the contract term and may well lead to milestone payments or royalty arrangements for new product discoveries. Tripos has a geographically diverse customer base, with approximately half of its revenues derived from European and other customers outside the United States. Tripos has a worldwide sales force with offices throughout the United States, in England, France and Germany, representatives throughout the Pacific Rim, and its Tripos Receptor Research chemistry laboratories in England.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all normal recurring adjustments necessary for a fair presentation of such financial statements have been included. Operating results for the three-month and six-month periods ended June 30, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001.

(2)     Income Taxes

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

(3)     Comprehensive Income

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

|                                                | Three-month Period |            | Six-month Period
|----------------------------------------------- | ------------------ | ---------- | ----------------
|                                                | 06-30-2001         | 06-30-2000 |                 
|Net income (loss)                               | $ 2,278            | $ (1,259)  |                 
|Unrealized gain (loss) on marketable securities | 10,320             | --         |                 
|Foreign currency translation adjustments        | (25)               | (221)      |                 
|Comprehensive income (loss)                     | $ 12,573           | $ (1,480)  |                 



Item 1. Financial Statements (continued)

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

|                                                | 06-30-2001 | 12-31-2000
|----------------------------------------------- | ---------- | ----------
|Foreign currency translation adjustments        | $(620)     | $(156)    
|Unrealized gain (loss) on marketable securities | 19,117     | 7,534     
|Accumulated other comprehensive income (loss)   | $18,497    | $7,378    

(4)     Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share for the quarters ended June 30, 2001 and 2000. The denominators for the quarters ended June 30, 2001 and 2000 reflect the 2-for1 stock split effective on February 5, 2001.

|                                                                                                      | Three-month Period |            | Six-month Period
|----------------------------------------------------------------------------------------------------- | ------------------ | ---------- | ----------------
|Numerator:                                                                                            | 06-30-2001         | 06-30-2000 |                 
|Numerator for basic earnings per share--net income (loss)
allocable to common shareholders            | $2,166             | $ (1,372)  |                 
|Add back preferred dividends     (Note A)                                                             | 112                | --         |                 
|Numerator for diluted earnings per share--net income (loss)                                           | 2,278              | $ (1,372)  |                 
|                                                                                                      |                    |            |                 
|Denominator:                                                                                          |                    |            |                 
|Denominator for basic earnings per share--
weighted average shares                                    | 7,310              | 6,992      |                 
|Effect of dilutive securities:                                                                        |                    |            |                 
|Employee stock options     (Note B)                                                                   | 1,100              | --         |                 
|Preferred shares     (Note A)                                                                         | 818                | --         |                 
|Denominator for diluted earnings per share--
adjusted weighted average shares and assumed conversions | 9,228              | 6,992      |                 
|Basic income (loss) per share                                                                         | $0.30              | $(0.20)    |                 
|Diluted income (loss) per share                                                                       | $0.25              | $(0.20)    |                 

Note A: Weighted average shares outstanding for the June 30, 2000 periods were not adjusted for the conversion of the Series B Preferred Stock as their inclusion would have been anti-dilutive. Accordingly, the related preferred dividends were not added back to the numerator for diluted earnings per share.

Note B: Employee stock options to purchase shares of the Company's common stock were not included in the June 30, 2000 computation of diluted earnings per share because the effect would have been anti-dilutive.

For additional disclosures regarding earnings per share, see the notes to the Company's 2000 consolidated financial statements in its Form 10-K.

(5)     Inventory

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

|                         | 06-30-2001 | 12-31-2000
|------------------------ | ---------- | ----------
|Raw materials            | $ 233      | $  580    
|Work in process          | 816        | 348       
|Finished goods           | 4,377      | 4,323     
|Reserve for obsolescence | (1,033)    | (906)     
|Total inventory          | $4,393     | $4,345    



Item 1. Financial Statements (continued)

(6)     Long Term Debt

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

The mortgage note under the current credit commitment calls for even quarterly principal payments based on a twenty-year amortization schedule that began June 30, 1999 (outstanding balance at June 30, 2001 was $2,988). Borrowings under the mortgage are subject to a variable interest rate at LIBOR plus 2.25%. An interest rate swap agreement was entered into that fixed the interest rate at 7.81% through April 30, 2002. A second swap was entered into that fixed the rate from May 1, 2002 to April 30, 2003 at 7.40%. The revolving line of credit under the credit commitment requires quarterly interest-only payments with any remaining borrowings due at the end of the three-year commitment period. Availability under the revolving line of credit is based on eligible U.S. accounts receivable. Borrowings under the revolving line of credit bear interest at variable rates tied to LIBOR or the bank's prime rate. At June 30, 2001, no borrowings were outstanding.

(7)     Series B Preferred Stock

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

|                                     | 06-30-2001 | 12-31-2000
|------------------------------------ | ---------- | ----------
|Issuance of Series B Preferred Stock | $8,970     | $8,970    
|Dividend accretion                   | 629        | 406       
|Total Preferred Stock                | $9,599     | $9,376    



(8)     Recent Accounting Pronouncements

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

(9)     Revenue Recognition

In late 1997, the Accounting Standards Executive Committee of the AICPA issued statement of Position 97-2 ("SOP 97-2"), "Software Revenue Recognition" and updated it in early 1998 with SOP 98-4. These SOPs became effective for us for transactions entered into after January 1, 1998. Tripos recognizes revenue from software licenses in accordance with these SOPs upon product delivery, customer acceptance with all obligations fulfilled at the date of delivery, and determination that collectibility of the sale proceeds is probable. Tripos recognizes revenue from software support contracts ratably over the term of the contract, typically one to three years. In software arrangements that include rights to multiple software products, specified upgrades, software support services and/or other services, we allocate the total arrangement fee among each deliverable based on the relative fair value of each of the deliverables determined based on vendor-specific objective evidence. Revenue from chemical compound sales is recognized upon delivery of the product. Hardware sales are recognized on delivery of the product from our vendor to the customer.

Tripos has entered into contract research agreements and software consulting arrangements with certain customers which provide for collaboration with us in defining related software products, early access to the products, discounts on licenses for the products developed and compound library design. We recognize revenue related to contract research and software consulting agreements as contractual milestones are achieved and delivered or, absent such contractual milestones, on a completed contract basis or a percentage of completion basis. The costs of providing the services for these revenues are included in Research & Development ("R&D") expenses for the periods in which the services are performed. Tripos reflects costs to fulfill discovery research, funded software development and software consulting service agreements in R&D to better reflect the synergies of staff interaction, fluctuations in staff utilization and variability of the outcomes from certain of these consulting contracts. A summary of the revenues and associated costs for the three- and six-month periods ending June 30, 2001 and June 30, 2000 is as follows:

| |                                             | Three-month Period |            | Six-month Period
| | ------------------------------------------- | ------------------ | ---------- | ----------------
| | Contract R&D Revenues and Costs             | 06-30-2001         | 06-30-2000 |                 
| | Collaborative software development services | $  526             | $ 443      |                 
| | Software consulting products & services     | 2,997              | 76         |                 
| | Discovery research services                 | 822                | 275        |                 
| | Total contract R&D revenues                 | $4,345             | $ 794      |                 
| |                                             |                    |            |                 
| | Research & development costs                | $2,788             | $ 532      |                 

(10)     Significant Customers

During the first six months of 2001, revenues from the sale of Software Consulting products and services to Bayer AG represented 21% of Tripos' net sales. For the same period in 2000, sales to Bayer AG accounted for 1% of total net sales.

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

Forward-looking Statements

The remainder of this report may contain certain statements that are forward-looking and involve risks and uncertainties. Words such as "expects", "anticipates", "projects", "estimates", "intends", "plans", "believes", variations of such words and similar expressions are intended to identify such forward looking statements. These statements are based on current expectations and projections made by management and are not guarantees of future performance. Therefore, actual events, outcomes and results may differ materially from what is expressed or forecast in such forward-looking statements. Among the factors that could cause actual results to differ materially from the forward-looking statements are set forth under the caption "Cautionary Statements -- Additional Important Factors to be Considered" in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") in Tripos' Form 10-K for 2000. Tripos undertakes no obligation to update any forward-looking statements in this Form 10-Q.

Overview

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

Tripos generates its revenues from a diversified offering of products and services. Our foundation is the software license and support products we sell to the life sciences industries. Over 88% of software license revenues are sold to the pharmaceutical and biotechnology industries. Tripos licenses its software and support in the form of one to three-year renewable contracts for any of its more than 50 software modules available for sale.

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

We leverage our expertise in chemical compound library design technology and synthesis to develop and manufacture general screening libraries for sale to the life sciences industries. The current library of over 80,000 highly pure and diverse compounds, is marketed under the name LeadQuest®.

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

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

(Continued)

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

In February 2000, Tripos entered into a strategic alliance with LION Biosciences AG to integrate LION's bioinformatics with Tripos' cheminformatics expertise. The companies are jointly marketing their products and services to the life sciences industry. As part of this alliance, LION made a $9.0 million investment in convertible preferred stock of Tripos. These funds are being used for general corporate purposes.

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

Tripos licenses its discovery software tools to customers, provides ongoing support, including upgrades selected by customers, and provides consulting services to its customers that enable integration of Tripos' discovery tools to customers' discovery operations. Certain long-term software licenses may, subject to certain rules of SOP 97-2 and SOP 98-4, be recognized over the life of the contract. Tripos generally expenses its research and development costs associated with software enhancements and new software tools. Thus, a significant portion of the costs associated with development and enhancement of software is accounted for as research and development and not as a cost of software sales.

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

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

Tripos' revenues and expenses vary from quarter to quarter depending upon, among other things, the timing of customers budget processes, the success of our sales efforts, the lengthy sales cycle and Tripos' ability to influence customers and prospective customers to make decisions to outsource portions of their discovery process, the size of the customers' capital expenditure budgets, the ability to produce compound libraries in a timely manner, market acceptance of new products and enhanced versions of existing products, the timing of new product introductions by Tripos and other vendors, changes in pricing policies by Tripos' partners and other vendors, consolidation in customer base, and changes in general economic and competitive conditions. In addition, Tripos may choose to negotiate a long-term software license contract that may, subject to certain rules of SOP 97-2 and SOP 98-4, be recognized ratably over the life of the contract. See Note 1 of the Notes to Consolidated Financial Statements for the year ended December 31, 2000 for a further discussion of revenue recognition policies. A substantial portion of revenues for each quarter is attributable to a limited number of orders and tends to be realized toward the end of each quarter. Thus, even short delays or deferrals of sales near the end of a quarter can cause quarterly results to fluctuate substantially. Tripos' quarterly results can be effected by the mix of its revenue components.

Results of Operations

Net sales for the second quarter of 2001 were $10,586 compared to $5,476 in 2000, an increase of 93%. Net sales for the six-months year-to-date were $20,514 and $10,474 for 2001 and 2000, respectively.

For the three-months ended June 30, 2001, software licenses sales increased 33% to $3,449. For 2001, we recorded strong software license business in the U.S. and Europe in addition to continuing collaborative software development contracts. Support revenues increased 4% to $1,957 compared to the second quarter of 2000. Discovery Services sales accounted for $1,148 in the second quarter of 2001 and $688 in the same period in 2000. This increase in Discovery Service business was attributed to orders for compounds in the quarter in addition to continued progress on the discovery research project with Lipha SA. Hardware sales increased by 358% to $1,035 for this three-month period in 2001 principally due to a large sale to a pharmaceutical customer.



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

(Continued)

For the six-months ended June 30, 2001, software licenses sales increased 44% to $5,783. For 2001, we recorded strong software license business in the U.S., Europe and the Pacific Rim in addition to continuing collaborative software development contracts. Support revenues increased 3% to $3,927 compared to the first half of 2000. Discovery Services sales accounted for $2,915 for the first six months of 2001 and $1,476 in the same period in 2000. This increase in Discovery Service business was principally from continued progress on the discovery research project with Lipha SA and compound sales. Hardware sales increased by 91% to $1,834 for the six-month period in 2001. Sales to existing customers represent 91% of total net sales for the six-month period ending June 30, 2001.

Net sales for the Company's activities outside of North America represented approximately 47% and 55% for the three months ended June 30, 2001 and 2000, respectively, and were 55% and 54% for the six-month periods of 2001 and 2000, respectively. Net sales in Europe increased 90% for the second quarter of 2001 compared to 2000 and accounted for 38% of net sales in both three-month periods. Net sales in the Pacific Rim, principally Japan, increased 11% compared to the second quarter of 2000 and accounted for 9% and 16% of net sales for the respective periods. Year-to-date net sales in Europe increased 131% in 2001 compared to 2000 and accounted for 47% and 40% of net sales for the six-month periods, respectively. Net sales in the Pacific Rim, principally Japan, increased 12% compared to the first six months of 2000 and accounted for 8% and 14% of net sales for the respective periods.

Cost of sales for the three-month period ending June 30, 2001 increased 138% compared to the same period in 2000. Cost of sales were $1,781 and $749 for the second quarter of 2001 and 2000, respectively. This change was due to increased costs directly related to higher sales of hardware and discovery services compared to the prior year. Cost of sales as a percent of net sales was 17% and 14% for the three-month periods in 2001 and 2000, respectively. Cost of sales were $3,352 and $1,938 for the first half of 2001 and 2000, respectively. For the six-month period ending June 30, 2001, cost of sales increased 73% compared to the same period in 2000. This change was due to increased costs directly related to higher sales of hardware and discovery services compared to the prior year. Cost of sales as a percent of net sales was 16% and 19% for the six-month periods in 2001 and 2000, respectively.

Gross profit margin percentage for the second quarter of 2001 decreased to 83% from 86% of total net sales compared to 2000. For the six months year-to-date, gross margin percentage increased to 84% in 2001 from 81% in 2000. These changes in gross profit percentage are due to changes inrevenue levels from hardware sales and from funded R&D projects that are described further in Footnote 9 to the unaudited consolidated financial statements.

Sales and marketing expenses increased 2% to $2,602 from $2,541 for the second quarter of 2001 compared to 2000. Sales and marketing expenses as a percentage of net sales were 25% and 46% for the three-month periods in 2001 and 2000, respectively. The decrease in percent to sales is primarily due to higher net sales in the second quarter of 2001. Sales and marketing expenses increased 2% to $5,238 from $5,125 for the six-month period in 2001 compared to 2000. Sales and marketing expenses as a percentage of net sales were 26% and 49% for the six-month periods in 2001 and 2000, respectively. The decrease in percent to sales is primarily due to higher net sales in 2001.

Research and development expenses increased to $3,640 from $2,292 and represented 34% and 42% of net sales for the second three-month periods in 2001 and 2000, respectively. The increase in expense dollars reflects costs to perform discovery research projects and incremental staffing required for the multiple software consulting services projects now in process. Six-month year-to-date R&D expenses were $7,079 in 2001 compared to $4,587 in 2000, 35% and 44% of net sales, respectively, and are due to the same contract activities mentioned for the quarter. For more discussion on R&D expenses see Footnote 9 to unaudited consolidated financial statements.

General and administrative expenses increased 20% to $1,503 for the second quarter of 2001 compared to $1,249 in 2000, and represent 14% and 23% of net sales for the respective periods. For the six-month period ending June 30, 2001, G&A expense was $2,980 compared to $2,471 for the same period in 2000. The increases in G & A expenses in the periods are due to additional public company related expenses and bonus accruals.

Other income (expense) increased from $96 of income for the second quarter in 2000 to $2,444 in 2001. This change was primarily due to the sale of shares of Arena Pharmaceuticals, Inc. common stock during Arena's recent secondary offering. Other income for the first half of 2001 was $2,765 compared to $263 in 2000 as a result of the sale of Arena common stock and an increase in net interest income.

Income tax expense was $1,226 for the second quarter in 2001, which represented an effective tax rate of 35%. No income tax benefit was recorded in the second quarter of 2000 due to the recognition of a valuation allowance on the future tax benefits of net operating losses in the U.K. Management believes that the net operating loss carryforwards, for which a valuation allowance was established, will be utilized in future periods. The effective tax rate utilized for the six-months ended June 30, 2001 (35%) reflects management's estimate of such rate for the fiscal year ending December 31, 2001.

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

(Continued)

Liquidity, Capital Resources and Capital Commitments

For the six-month period ending June 30, 2001, net cash provided by operations was $5,845 primarily due to net income of $3,010, decrease in trade accounts receivable of $3,674, increases in accounts payable and accrued expenses of $1,374 along with depreciation and amortization of $942 and $114 respectively, which were offset by increases in and prepaid expenses of $221, inventories of $226, notes receivables of $860 and a decrease in deferred revenue of $2,199.  For the same period in 2000, net cash used by operations was $1,396 primarily due to decreases in trade accounts and notes receivable of $4,028 along with increases in depreciation, amortization and deferred revenue of $966, $239, and $550 respectively, which were offset by a decrease in accounts payable and accrued expenses of $1,409 and increases in prepaid expenses of $1,135 and inventory of $1,251 coupled with the net loss of $3,384.

Cash used by investing activities in 2001 relates to property and equipment acquisitions ($1,260) needed throughout the company and an investment in the AM Pappas TechAmp II life sciences fund ($525). During the six-month period in 2000, investment activities were principally related to capital expenditures and capitalized development.

Financing activities in 2001 generated funds from employee stock plans of $1,267 that were partially used to reduce outstanding debt ($398). In 2000, the company received $8,970 from Lion Bioscience in exchange for Series B Preferred stock and $1,109 from employee stock plans. These funds were used to retire $5,122 of outstanding debt.

The Company anticipates that current working capital of $34,581 together with continued cash flow from operations, payments to be received under current and contemplated strategic partnership contracts, the $4,000 line of credit and access to equipment lease financing, will be sufficient to fund its operations for at least the next twelve months. For a description of certain factors that could adversely affect the Company's future capital requirements and the adequacy of its available funds, including factors that are beyond the Company's control, see the discussion under the caption "Cautionary Statements-Additional Important Factors to be Considered" in the Company's Annual Report on Form 10-K for the year ended December 31, 2000.



PART II

OTHER INFORMATION

Item 1.     Legal Proceedings

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

Item 2.     Changes in Securities

None

Item 3.     Defaults upon Senior Securities

None

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

Three matters were submitted to a vote of the shareholders of the Company at its Annual Meeting of Shareholders on May 10, 2001:

1) The following directors were elected to serve for the ensuing year or until the earlier of death, resignation or removal. Votes cast were as follows:



|                  | Votes     | Votes               
|----------------- | --------- | --------------------
|                  | "For"     | "Withhold Authority"
|Ralph S. Lobdell  | 6,979,931 | 572,452             
|Alfred Alberts    | 7,084,703 | 467,680             
|Stewart Carrell   | 7,078,841 | 473,542             
|John P. McAlister | 6,083,171 | 1,469,212           
|Gary Meredith     | 5,230,986 | 2,321,397           
|Ferid Murad       | 7,094,027 | 458,356             





2) To amend the 1994 Stock Option Plan to increase the number of shares authorized for issuance from 2,560 to 2,960 shares. The matter was approved by the shareholders by the following tally of votes:



|Votes     | Votes     | Votes    
|--------- | --------- | ---------
|"For"     | "Against" | "Abstain"
|3,028,369 | 2,568,871 | 3,594    

3) To amend the 1994 Director Stock Options Plan and the 1996 Director Stock Compensation Plan to allow discretionary option grants and stock issuances. The matter was approved by the shareholders by the following tally of votes:



|Votes     | Votes     | Votes    
|--------- | --------- | ---------
|"For"     | "Against" | "Abstain"
|3,024,735 | 2,572,823 | 3,276    



Item 5.     Other Information

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



Item 6.     Exhibits and Reports on Form 8-K

(a) List of Exhibits

None

(b) No reports on Form 8-K were required to be filed during the period from March 31 to June 30, 2001.





TRIPOS, INC.

SIGNATURES

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

TRIPOS, INC.

|Date: | August 10, 2001 | /s/ John P. McAlister                       
|----- | --------------- | --------------------------------------------
|      |                 | President and                               
|      |                 | Chief Executive Officer                     
|      |                 |                                             
|      |                 |                                             
|Date: | August 10, 2001 | /s/ John D. Yingling                        
|      |                 | Vice President and
Chief Accounting Officer,
|      |                 | Assistant Secretary