[X]  Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the fiscal year ended December 31, 2000.

[  ]  Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from _____________ to _______________.

(Exact name of registrant as specified in its charter)

Registrant's telephone number, including area code: (314) 647-1099

Securities registered pursuant to Section 12(b) of the Act:

                                                           Title of each class                                                                                  Name of each exchange on which registered:

                                                                  None                                                                                                                       None

Securities registered pursuant to Section 12(g) of the Act:

Common stock, $.005 Par Value

Preferred Stock Purchase Rights

______________________________________________________________________

(Title of class)

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 requirements for the past 90 days. Yes X No __.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K [X].

The aggregate market value of the voting stock held by non-affiliates of the Registrant as of March 13, 2001, was $41,885,470 (based upon the March 13, 2001 closing price for shares of the Registrant's Common Stock as reported by the NASDAQ National Market). Shares of Common Stock held by each officer, director and holder of 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

On March 13, 2001, 7,251,200 shares of the Registrant's Common Stock, $0.005 par value, were outstanding.

Portions of the Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held May 10, 2001 are incorporated by reference into Part III.

Tripos' strong cheminformatics foundation provides its customers with what we believe are distinct competitive advantages. Our "chemically intelligent" discovery software tools are able to effectively manage, analyze and share biological and chemical information. Tripos' software consulting services work closely with customers to review their specific requirements for organizing and storing chemical and other data in a manner that is conducive to aid discovery research. Tripos' proprietary chemical compound libraries integrate our unique molecular design technology with our synthesis capabilities, providing high quality, designed materials for the high-throughput screening processes used in discovering new drug candidates.

Our discovery research services leverage Tripos' cheminformatics expertise in molecular design analysis and medicinal chemistry to provide sophisticated technologies that can navigate around patented chemical areas and predict characteristics early in the discovery process. The power of integrating these unique products and services allow our customers to take full advantage of cutting-edge methods and techniques for discovering new drugs, and accelerate the development and commercialization of their new products.

Our customers, many considered industry leaders, use Tripos products and services to reduce product discovery costs and time-to-market. Over the last two years, Tripos has entered into strategic alliances with pharmaceutical companies that include, Lipha S. A., Bristol Myers-Squibb, Bayer, and Pfizer/Parke-Davis, and with biotechnology companies including Arena Pharmaceuticals, LION bioscience AG and the Wolfson Institute. Certain of these contracts provide for recurring payments for products and services over the course of the contract term, as well as milestone payments or royalty arrangements for new product discoveries. Additionally, the United States government has recognized Tripos with several SBIR grants for developing pharmaceutical data analysis methods. Tripos has a geographically diverse customer base, with more than half its 2000 revenues derived outside the United States. Tripos worldwide sales force has offices throughout the United States, in England, France and Germany, as well as representatives throughout the Pacific Rim and China. The company's chemical production laboratories, Tripos Receptor Research is located in England.

The remainder of this Item 1 contains 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"). Tripos undertakes no obligation to update any forward-looking statements in this Form 10-K.

The success of companies in the pharmaceutical, biotechnology, chemical and agrochemical industries is substantially dependent upon their ability to identify new chemical compounds with targeted activities and properties that can be brought to market rapidly and on a cost-effective basis. The discovery and development of a new product candidate typically involves many investigative phases, including storage, retrieval, analysis, review, communication, management and manipulation of large volumes of information relating to chemical structures and properties, pattern recognition, statistical information, reactions involved in syntheses and biological properties. Based on industry data, the average pharmaceutical discovery process requires synthesis and testing of more than 10,000 chemical compounds for each single new product brought to market. Tripos estimates that up to 30% of the expense of new product research and development arises in the pre-clinical phases of new pharmaceutical development, the equivalent pre-approval phase of agrochemical product development, and product discovery phases of chemical research.

Industry pressure to reduce product development cost and time-to-market are in part attributable to increased competition and increased political, regulatory and consumer scrutiny. By reducing the time-to-market, pharmaceutical companies can generate substantial amounts of additional profits before their product's exclusivity patent expires and remanufacturers move in to take market share. In addition, environmental regulations and consumer activism are forcing chemical and agrochemical companies to evaluate alternative products and ways of doing business, thereby increasing their product development and operating costs. Pharmaceutical and biotechnology companies have focused their R&D efforts on both novel compounds exhibiting demonstrable benefits over existing commercial drugs, and on novel targets, many of which are emerging from work being done on the well known human genome project. In the search for biological activity, many companies have implemented high-throughput screening laboratories with robotic systems for the rapid analysis of large numbers of compounds. The industry outgrowth of this development has increased demand for chemicals to screen and companies are buying thousands of compounds a year to robotically process in hopes of uncovering a chemical series that demonstrates the potential to be developed into a new drug.

High-volume screening has resulted in an unprecedented information explosion of chemical data points that need to be processed, managed, and analyzed and used for decision making. Repositories for this data must be built and the data must be mined and shared, many times across multi-national, cross-corporate boundaries. The race to bring new chemical entities to the pharmaceutical market often logjams with ineffective information management. Effective integration of chemical data and information technologies provides the industry a solid opportunity to speed the discovery process and reduce costs.

Tripos' foundation is built on its expertise and industry reputation as a cutting-edge molecular design software provider. Understanding, managing and analyzing chemical information has always been our area of expertise. Realizing the business opportunities that designing molecules with enhanced biological value brings to accelerating the drug discovery industry, Tripos built a high quality compound production laboratory. Using sophisticated cheminformatics we design and produce drug-like compounds for screening using proven, reliable and patented methods. Customer demand for information-rich compound libraries supports our business vision.

Tripos believes it offers a uniquely integrated suite of innovative, knowledge-based discovery products and services that accelerate the discovery process for customers. This powerful integration of Tripos software analysis tools, related software support, customized information management services, designed chemical compound libraries, and the expansive list of additional discovery research services is an unique and unprecedented approach to solving discovery research problems. We seek to accelerate product discovery and reduce time-to-market by offering customers the opportunity to outsource research and discovery activities that cannot be efficiently performed in-house.

-    State-of-the-art discovery software products that identify the molecular properties of virtual compounds most likely to be suitable as drugs;

-    Collaborative discovery software development to address unique molecular analysis requirements that accelerate discovery;

-    Software consulting services that develop global platforms to link important discovery data together across corporations, fostering information sharing

     that can accelerate the drug discovery process;

-    A proprietary compound library of over 80,000 potential lead candidates which we believe can be used by multiple customers on multiple projects

     to support new product discoveries;

-    Discovery research services that enable customers to more efficiently and rapidly design multiple series of related chemical compounds to enhance the discovery process;

-    Integration of informatics software and discovery research services to maximize the effective contribution to new discoveries; and

-    A worldwide focus on our customer base, which has resulted in strategic arrangements with many leading pharmaceutical as well as emerging biotechnology companies.

Tripos has successfully demonstrated the integration of software, research and services through its collaborations with Arena Pharmaceuticals and the Wolfson Institute. The rapid and efficient discovery in these collaborations resulted in two lead series of compounds progressing from inception to in-vivo biology in less than nine months that are now being actively marketed to the pharmaceutical industry.

Products and Services

Tripos offers a complementary range of new research technologies including Discovery Software, Software Consulting Services and Discovery Services.

Discovery Software offers customers the ability to accelerate the identification and optimization of new compounds that have the potential to become products. Tripos' design tools improve the efficiency of the research process by identifying physical and structural properties of molecules that are likely to make them suitable as drugs, then use this information to design novel molecules that possess these properties. These calculations are based on complex pattern analysis and 3D simulation of chemical structures and behaviors, and often involve 10,000 molecules or more. By viewing and analyzing the results of calculations done with Tripos' software products, scientists can make decisions about which compounds to move forward in their research. Tripos Discovery Software enables scientists to avoid costly synthesis and testing expenses for chemical compounds that are not likely to be effective. Our proprietary software is used by scientists at major research facilities around the world to manage, analyze and share biological and chemical information.

The information produced through Tripos' expert design environment can be easily accessed and reviewed by non-specialist users of the software such as medicinal chemists and biologists. This easy communication and collaboration is accomplished through Tripos' chemical Intranet technology.

Tripos is uniquely positioned to meet the growing demand in the life sciences industries for integrated, managed information that spans all aspects of research data. The highly specialized research these industries require an experienced understanding of the discovery process. Tripos draws upon two decades of experience developing scientific software applications for the pharmaceutical and biotechnology industries. Our highly trained consultants work in scientific software consulting teams to build exceptional enterprise applications specifically designed for research.

To increase productivity and reduce time and cost in developing new chemical entities, customers must make faster, more precise decisions. Tripos' innovative MetaLayer^TM data integration system, developed to client specification, integrates diverse cross-corporate data sources into a single repository of accessible information. The MetaLayer allows any network-client access to all distributed data or application information.

Tripos' consulting services are available to assist at all stages of an information technology project, including:

Analysis and Specification: Tripos is skilled at interviewing end-user scientists to determine essential business tasks, current business logic, and workflow. We can perform this phase of a project independently or work with other consultants that are engaged by the customer, in order to ensure that the highest level of scientific understanding is part of any ongoing project. Our scientific software teams are experienced at determining the functional, performance and interface requirements of a new application. Tripos enlists real users for paper prototype systems to assist in validating requirements, as well as ensuring a complete and shared understanding of the system requirements.

Research and Design: Tripos' scientific skills help the customer develop novel methods for drug discovery. We have the inside edge for modifying and extending existing Tripos drug discovery software to explore new ideas. Our software engineers are skilled in data modeling and object-oriented design, which reduce the risks involved in engineering complex chemical and biological information systems.

Implementation and Maintenance: Tripos' large staff of Ph.D. scientists with real industry experience is skilled in all vital web-related technologies. We created the first significant, and industry recognized chemistry applications to be written in Java and we are an industry leader in providing high-quality and high-value customer support for scientific software applications. Our customers have always ranked us highly when it comes to providing helpful and timely assistance.

With the rapid changes in technology and the fluctuating demand for high-level capabilities driven by project initiations and terminations, outsourcing chemistry in discovery research is increasingly valuable to the life science industries. Tripos provides discovery research services in high-throughput and medicinal chemistry to identify, refine, and optimize compounds for our customers guided by our specialized design and analysis expertise.

Recent advances in the area of high-throughput screening (rapid screening of compounds for biological activity) have given rise to the need for large numbers of information-dense compounds by pharmaceutical, biotechnology and other life science companies. These companies routinely acquire thousands of compounds per year to screen in search of novel classes of active compounds. By applying Tripos' compound design technology in conjunction with its synthesis capabilities, we have brought to market LeadQuest®, a growing compound library that now includes over 80,000 compounds that meet our diversity and purity criteria. This library provides an efficient source of compounds for screening by eliminating the redundant and impure samples from the screening effort that are characteristic of other commercial and internal screening collections. When LeadQuest compounds demonstrate activity in pharmaceutical company assays, we can quickly and efficiently provide hundreds of similar compounds for follow-up screening, lead optimization and scale-up synthesis for these interesting compounds. Patent navigation technologies can be employed if required.

Tripos has invested substantially in state-of-the-art chemistry in the form of screening libraries, follow-up target-focused libraries and medicinal chemistry. In 1997, we purchased Receptor Research Limited. Tripos Receptor Research is now fully integrated into our worldwide operations. We sell non-exclusively designed libraries of chemicals for biological screening and also offer specialized libraries designed according to customer requirements, based on the results of their biological testing.

Tripos also uses the Tripos Receptor Research facilities to participate with collaborators in therapeutic discovery projects. Our unique position with respect to informatics and analysis gives us a distinct advantage in this competitive chemistry market.

The Collaborative Research group's focus is on internal discovery collaborations with Arena Pharmaceuticals and the Wolfson Institute. Tripos is combining its strengths in molecular design, combinatorial chemistry, and data capture with the pioneering expertise of these complimentary organizations. Our investments and collaborative efforts are structured to deliver long-term revenue and profits based on successful research that leads to new broad-based products when partnered with pharmaceutical, biotechnology, and related companies. This unit is dedicated to managing efforts critical to the success of these projects and investments. Our goal is to partner these compounds with pharmaceutical companies for an up-front license fee and milestones related to any further development.

Tripos has developed a patented proprietary technology for the storage and searching of vast numbers of combinatorial products and related data called ChemSpace^TM. The unique searching methods enable the user to identify new compounds that are likely to have similar activity to the original molecule while avoiding problematic side effects or toxicity. Using this technology, Tripos has rapidly created a database of trillions of synthetically accessible small organic chemical structures that are searchable in real time at the rate of two trillion per hour. The database can be customized to include reactions and compounds that are proprietary to an individual customer project. Tripos may license this technology to a limited number of pharmaceutical companies as a highly valuable part of contract research relationships. ChemSpace has proven to be an invaluable tool in performing the compound design activities in both contract research and collaborative research relationships.

Tripos resells computer systems manufactured by Silicon Graphics Inc. to its customers upon request. We do not have an inventory of systems on-hand, but merely facilitate the customers' orders. We provide this service as a convenience to our customers and do not expect nor realize high margins on these products.

Tripos sells its software products directly in the U.S. and Europe, through an exclusive distributor arrangement in Japan, and through non-exclusive agency relationships in Korea, China, Singapore, India and Australia. On December 31, 2000, our sales force consisted of 39 management, technical, sales and administrative employees: 17 for the United States and Canada, 20 in Europe, and 2 for the Pacific Rim. Our domestic sales and support center is located at our headquarters in St. Louis, Missouri. We also maintain sales offices in California, New Jersey, Massachusetts, and near London, Paris and Munich.

Tripos employs separate teams for our software product lines for workstations. These teams, which include scientists working in collaboration with our sales employees, have developed a consultative sales approach through which we have created relationships with our key customers. We believe these relationships enable us to understand and better serve the needs of our customers. Because our customers frequently have both domestic and international operations, our sales staff and scientists in foreign locations work closely with their counterparts in the United States to ensure that our customers' international needs are met in a coordinated and consistent fashion.

Tripos sells its workstation-based software products in a variety of ways, one of which is term licenses on the basis of a fixed number of simultaneous users per module. Network-based licensing is available, based on a count of the number of simultaneous users. We have also introduced one, two and three year token license options that offer customers the ability to tailor their product selections to their specific research needs and that are renewable at the end of the selected terms. We expect our customer base to migrate to shorter-term license renewals based on the flexibility to access more of our software products. These arrangements are expected to provide a predictable recurring revenue stream from periodic renewals. Software packages consisting of modules typically purchased by customers in particular industry segments have been defined and have been specially priced to facilitate customer purchase of an optimal module set for their problems.

Software Consulting Services are sold on a collaborative basis, by direct salespeople and scientists, to the end user chemist and information technology departments at the customer site. Each contract is negotiated based on the custom software service needs of the customer. The term of the contract is highly variable but current examples range from two weeks up to three years. Tripos provides programming and scientific expertise on a cost plus margin basis. Services may include specifications, gap and risk assessment, and full biological and chemical data integration. Our proprietary MetaLayer technology may be installed at a client site to integrate global information to the desktop. This technology has a license fee and annual maintenance fees.

Sales of the compound libraries are made through a staff dedicated to product sales. The LeadQuest® library now includes over 80,000 compounds that are available for purchase. The compounds are sold on a nonexclusive basis to all purchasers and Tripos retains no trailing rights to the compounds once purchased by a customer.

Tripos' sales staff includes employees with Ph.D. degrees in chemistry, various advanced degrees in the sciences and work experience with various hardware and software suppliers as well as with the industries we serve. Our sales representatives are compensated through a combination of base salary, commissions and bonuses based on quarterly and annual sales performance. In addition, our pre-sales scientists, all of whom have Ph.D. degrees in chemistry or a closely related field, receive total compensation determined in part by their success in supporting and generating sales in a particular territory.

Contract research and software development relationships are offered through a team comprised of salespeople, discovery scientists and members of the senior management staff. This approach is best suited for the long cycle required to develop meaningful partnerships with key customers for the outsourcing of discovery research.

Tripos exhibits its products and services at various scientific conferences and trade exhibitions, including national and regional conferences of the American Chemical Society, at the IBC Drug Discovery Conference, Society for Biomolecular Screening and the CHI High Throughput Screening for Drug Discovery Conference. Tripos scientists frequently publish and present results of original research at these and other conferences throughout the world.

Tripos sells its personal computer software products principally through direct mail and relationships with distributors.

Tripos' licenses typically provide a limited warranty for a 90-day period. Thereafter, support of our software products is provided for an annual fee. Approximately 78% of our commercial customers and 52% of our academic customers have contracted for support service. This service gives customers access to telephone consultation with our technical personnel in local offices, on-line access to a company-operated computer bulletin board, new release versions of licensed software and other support required to utilize our products effectively.

Tripos offers customer training in the use of its products through staff knowledgeable in both chemistry and computer science. We send technical newsletters, bulletins, and advance notification about future software releases to our customers to keep them informed and to help them with resource allocation and scheduling. We also sponsor seminars throughout the world for our customers, involving presentations both by our personnel and guest lecturers. These seminars are designed to enhance customer understanding of our products and their potential utilization as an aid to customer research requirements. We currently provide our customers with advice on computer system configuration management and frequently provide customers with consulting advice in addressing particular research questions as part of the normal pre- and post-sales process.

Tripos believes that its position as a leader in discovery products and services will depend in large part on its ability to enhance its current product line, develop new products, maintain technological competitiveness, integrate complimentary third-party products and meet a rapidly evolving range of customer requirements. We intend to continue to make substantial investments in product and technology development to meet our customers' demands.

We have previously experienced delays in developing new products ranging from a few days to approximately twelve months. The complexity of developing new and enhanced scientific information management software in a client/server environment is significant. Delays or unexpected difficulties in any segment of a development project can result in late or undeliverable product. In view of this complexity, there can be no certainty that we will be able to introduce our products on a timely basis in the future, or that our new products and product enhancements will adequately meet the requirements of the marketplace or achieve market acceptance.

Tripos' research and development activities are undertaken by its Discovery Software group and its Discovery Services group. The Discovery Software group, composed of chemists and other scientists, works closely with customers to identify market needs for new products. Upon identification of a market need for a new product, the Discovery Software group collaborates with our software engineers to develop requirements and specifications, implement code and perform regression tests for the new product. Separate quality assurance, environment management and systems groups manage the final release, documentation and porting of the new product to all supported platforms. In addition, Tripos funds research at certain academic institutions. We believe that this funding allows us to gain access to significant technology not otherwise available. We enter into funded research and development arrangements with major pharmaceutical customers to develop software tools crucial to data capture and management in high throughput environments.

Tripos derives Discovery Service revenues from its compound library product, LeadQuest®, and Discovery Contract Research services conducted at our laboratories at Tripos Receptor Research in Bude, England. In September 1998, we opened our first laboratory facility suitable for all chemical synthesis operations. We began production of newly designed screening libraries, started pilot projects for contract research and generated focused libraries in our internal therapeutic collaborative work with Arena Pharmaceuticals and the Wolfson Institute. In May 1999 we opened our second and larger laboratory facility, providing us with the capacity to accommodate large library synthesis and contract research operations simultaneously. By the end of 1999, we had reached our targeted monthly synthesis and purification rate. The inventory of compounds of the LeadQuest® library has increased to over 80,000 highly pure compounds available for sale and we completed several contract research projects. Presently, these facilities serve customers' contract research needs and continue to add to the LeadQuest® library.

Research and development expenses include all costs of software development and maintenance, all necessary expenses to deliver upon software consulting service contracts, all non-capitalized costs associated with the production of compound libraries and all costs of fulfilling discovery research projects. In accordance with Statement of Financial Accounting Standards No. 86 and SOP 98-1, Tripos capitalizes software development costs for both external and internal use.

Tripos has entered into consulting contracts with certain customers that provide for collaboration in customizing chemical compound libraries for drug discovery in specific therapeutic areas. We recognize revenue related to such agreements as contractual milestones are achieved and delivered or, absent such contractual milestones, on a completed contract basis.

Our software consulting services consist of building customized systems solutions for our customers. Chemical research teams require improved information access and usage in their discovery process. We help our customers meet these needs by applying our expertise in web technologies, chemical information systems, and biological data handling to build integrated systems designed specifically for the customer's environment and discovery process. Revenue is recognized as technology is delivered or services are performed.

Tripos relies upon a combination of patent, copyright, trademark and trade secret laws. License and non-disclosure agreements are used to establish and protect the proprietary rights in our products. We hold three key patents in the area of analysis of the relationship of chemical structure to activity; one issued in the early 1990's on our SYBYL QSAR product, another issued in 1998 on our Hologram QSAR, and a third on our ChemSpace technology issued in early 2001. From 1996 to 2000, Tripos applied for nine (9) other software patents and, jointly with collaborators, for an additional four (4) composition-of-matter or related use patents, three of which are patent-pending. The source code for our products is protected both as a trade secret and as an unpublished, copyrighted work. In addition, our core software products are developed and manufactured only at our St. Louis facility. Tripos does not disclose the source code for its products to any of its distributors. We supply our source code under special, restrictive license provisions to a very limited number of customers only on special request, none of which has been received in the last five years. Also, upon request, Tripos has placed source code in escrow for use by a minimal number of designated customers for limited support purposes on a contingency basis. All major software products are shipped from our St. Louis facility under a technical license management system that governs access. Despite these precautions, it may be possible for a third party to gain use of our products or technology without prior authorization, or to develop similar technology independently. Effective copyright and trade secret protection may be unavailable or limited in certain foreign countries where Tripos does business. The markets in which we compete are characterized by rapid technological change. While we believe that legal protection of our technology is an important competitive factor, we are aware that such factors as the technological and creative skills of our personnel, new product development, frequent product enhancements, name recognition and reliable product support are important in maintaining a sustained technology leadership position.

Tripos licenses its workstation software through the execution of license agreements. We license our personal computer software products by use of a "shrinkwrap" license. A "shrinkwrap" license agreement is a printed license agreement included within packaged software that sets forth the terms and conditions under which the purchaser can use the product and is intended to bind the purchaser, by the purchaser's acceptance of the software, to such terms and conditions.

Tripos has a number of contracts with academic institutions and individuals providing it the right to license, market and use technology developed outside the company. These products enhance our ability to offer an enriched product line and represent a material percentage of our annual revenue.

Tripos' general screening and targeted compound libraries, which are manufactured and shipped by Tripos Receptor Research from its Bude, England facilities, and the related synthesis methods and approaches, are protected by non-disclosure agreements during the prospective customer's evaluation and/or use. Compound, consulting, contract research and collaborative agreements entered into by Tripos require specific documentation regarding defined proprietary rights, responsibilities of the parties, and/or allowed use of any related compounds or libraries of compounds.

Tripos operates in a highly competitive industry characterized by rapidly changing technology, frequent new product introductions and enhancements, and evolving industry standards. We compete with other vendors of software products designed for applications in analytical chemistry, computational chemistry, chemical information management, and combinatorial chemistry; the four principal areas in the chemical and pharmaceutical research market. Our Discovery Services group competes with other vendors for the sale of contract research, targeted libraries and diverse compound libraries.

Competition is likely to intensify as current competitors expand their product offerings and as new companies enter the market. The competition we experience in our existing and targeted markets could result in price reductions, reduced margins and loss of market share, all of which could have a material adverse effect on us. A number of our existing competitors have significantly greater financial, technical and marketing resources than we do. We believe that the principal factors affecting competition in our markets are product quality, performance, reliability, ease of use, technical service, support, and price. We expect that these factors will remain major competitive issues in the future, but additional factors will become increasingly important, including contribution to the overall efficiency of the research effort through enhanced integration, communication and analysis. Although we believe that we currently compete favorably with respect to these factors, there can be no assurance that we will be able to compete successfully against current and future competitors or that the competitive pressures we face will not have a material effect on our business, operating results or financial condition.

Our software production operations consist of assembling, packaging, shipping of software and database products along with documentation needed to fulfill orders. Outside vendors provide printing of documentation, manufacturing of packaging materials and assembly of our desktop products. We typically ship our software products promptly after the acceptance of a customer purchase order and the execution of a software license agreement. Accordingly, we do not generally have any significant software backlog, and we believe that a backlog at any particular time, or fluctuations in backlog, are not indicative of sales for any succeeding period.

LeadQuest® chemical compounds are designed and manufactured at Tripos Receptor Research in Bude, England. Compound sales are shipped shortly after the execution of a sales contract between the customer and Tripos. The potential for backlogs exists in the delivery of compounds due to the nature of the materials to be accumulated, packaged and shipped along with the sometimes lengthy compound selection process of the customer. Backlogs will fluctuate based on the number, size and timing of orders received, and availability of product.

Tripos does not derive 10% or more of its total sales from any single customer.

Tripos sells its software and compound products through its wholly owned subsidiaries in Europe and through a network of distributors in the Pacific Rim, Australia and India. Net sales from the Company's activities outside of North America represented approximately 48%, 55% and 57% of total net sales in 1998, 1999, and 2000, respectively. Net sales in Europe accounted for 40%, 46% and 47% of net sales in 1998, 1999, and 2000, respectively, with the balance from customers in the Pacific Rim. We believe that revenues from our foreign activities will continue to account for a significant percentage of total net sales. See Note 7 to the consolidated financial statements, Geographic Segment Data, later in this Annual Report.

As of December 31, 2000, Tripos had a total of 224 employees, of whom 122 were based in the United States and 102 were based internationally. Of the total, 61 were engaged in marketing, sales and related customer-support services, 57 in product development and services, 74 in chemistry laboratory activities and 32 in operations, administration, MIS and finance. Our future success is significantly dependent on the continued service of our key technical and senior management personnel and our continuing ability to attract and retain highly qualified technical and managerial personnel. None of our employees are represented by a labor union nor covered by a collective bargaining agreement. We have not experienced any work stoppages and consider our relations with employees to be good.

The information required by this item is included in the Tripos' Proxy Statement in connection with its Annual Meeting of Shareholders to be held on May 10, 2001 under the caption "Management", and is incorporated herein by reference .

Tripos' principal administrative, sales, marketing and product development facilities are located in St. Louis, Missouri. Tripos owns these facilities which are financed by a mortgage note. Laboratory facilities in Bude, England are owned by the Company. Tripos leases two domestic sales and service offices in Shrewsbury, New Jersey and South San Francisco, California. Our European subsidiaries lease sales and service offices in the United Kingdom, France and Germany. We believe that our existing facilities are adequate for our current needs and that additional space will be available as needed.

Tripos is currently not a party to any material litigation and is currently not aware of any pending or threatened litigation that could have any material adverse effect upon its business, operating results or financial condition.

No matters were submitted to a vote of Tripos' shareholders during the fourth quarter of its fiscal year ended December 31, 2000.

Tripos' common stock trades on The NASDAQ National Market System under the symbol "TRPS". The following table sets forth the range of the high and low sales prices per share of the common stock for the fiscal quarters indicated, as reported by NASDAQ. Quotations represent actual transactions in NASDAQ's quotation system but do not include retail markup, markdown, or commission.

Note: values represent an adjustment for the 2-for-1 stock split effective on February 5, 2001 for holders of record on January 12, 2001.

Tripos had approximately 1,000 shareholders of record and 2,600 street name holders as of December 31, 2000. We have not declared or paid any dividends on our Common Stock. We currently intend to retain earnings for use in our business, therefore, we do not anticipate paying cash dividends in the foreseeable future to common shareholders. In February 2000, Tripos sold 409,091 shares of Series B Convertible Preferred Stock in a private placement transaction. The Series B shares carry a dividend rate of 5% payable in cash or stock at the holder's option, are redeemable in February 2005, and are initially convertible into shares of Common Stock on a one-for-one basis.

Tripos, Inc. is a leading provider of an integrated array of discovery software, software consulting services, and discovery research products and 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. In 2000, over 83% of software license revenues were sold to the pharmaceutical and biotechnology industries; however, no single customer represented more than 10% of revenues to Tripos. 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. In 2000, 66% of revenues were derived from the sale of software licenses and support.

Tripos' 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. Revenues in 2000 were 5% of total revenues, and we expect to increase sales activity to support future revenue growth. Revenue is generated on a billable rate per day and is recognized as services are performed. These contracts may also generate substantial license fee revenue for Tripos' proprietary software technologies. The magnitude of these license fees is dependent on each customer's required usage levels. Variations in licensing levels can be several million dollars and therefore may be sufficient to impact the comparability of quarterly results.

Tripos leverages its expertise in chemical compound library design technology to develop and manufacture general screening libraries for sale to the life sciences industries. Its current library of over 80,000 highly pure and diverse compounds, is marketed under the name LeadQuest®. In 2000, 9% of revenues were derived from the sale of this product.

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. In 2000, Tripos also marketed a comprehensive research process to its life sciences customers for rapid and cost effective discovery. This process combines advanced informatics, chemistry and biology products and services, and proprietary discovery technologies for efficient lead development, refinement, and optimization. What was separate products and services is now tightly integrated to facilitate synergies in the drug discovery process. In 2000, Tripos entered into a one-year multi-million dollar research agreement with Lipha S.A. to provide integrated services to identify drug candidates. Revenues generated by contract research activity, including the Lipha contract, were 9% of total net sales.

Tripos also acts 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.

In February 2000, Tripos entered into a strategic alliance with LION bioscience AG to integrate LION's bioinformatics with Tripos' cheminformatics expertise. The companies jointly market 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 and staffing to fulfill contracts such as the landmark joint cheminf ormatics/bioinformatics integrated solution project for Bayer AG. This project, valued at approximately $25 million for Lion and Tripos, includes technology license fees, R&D funding and milestone payments over a 30-month period.

In 1999, Tripos created a strategic alliance with Cyprotex, a newly formed company whose focus is development of in-vitro screens and data modeling capabilities to predict biological reactions of new chemical entities. These reactions are essential in determining the survival of new drug candidates. Tripos and Cyprotex jointly market their services to the drug discovery market.

In 1999, Tripos completed its investment in collaborative internal drug discovery programs with Arena Pharmaceuticals and the Wolfson Institute. These collaborations generated, in a relatively brief nine-month period, patented lead compounds that are actively being marketed for commercial development in partnership with a pharmaceutical company. The results of this marketing activity are not known at this time and are not included in any business model at this time.

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.

Quarterly expenses include the fixed costs of research and development for software development and contract research. Tripos believes that its core selling and administrative costs will remain constant as a percent to sales on an annual basis. Variability in quarterly expenses primarily occurs in relation to the level of revenues for sales compensation and bonuses and staffing for software consulting services to perform against contracts.

During 1998 and 1999, Tripos 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. Beginning in fiscal year 2000, Tripos utilized cash available from an equity investment in the Company to maintain capital infrastructure, reduce debt levels 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, client involvement in decision points in contracts related to project plans, 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 a further discussion of revenue recognition policies. A substantial portion of product-based revenues for each quarter is attributable to a limited number of orders and tends to be realized toward the end of each quarter. 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. The variability of the timing, term, scope and magnitude of service-based contracts along with Tripos' ability to attract additional contracts can have a significant impact on quarterly and annual comparisons.

Except for the historical information and statements contained in Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"), the matters and items contained in this document, including MD&A, contain certain forward-looking statements that involve uncertainties and risks, some of which are discussed below, including, under the caption "Cautionary Statements-Additional Important Factors to be Considered." Tripos is under no obligation to update any forward-looking statements in this section. 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.

The following table sets forth, for the periods indicated, certain consolidated financial data as a percentage of net sales, (except costs of sales data, which is set forth as a percentage of the corresponding net sales data):

Net Sales. Net sales increased approximately 7% from $25.6 million in 1998 to $27.2 million in 1999, and increased 7% in 2000 to $29.0 million. The increase in 1999 was due to the increase in sales of diverse chemical compound libraries and contract research in the Discovery Services business. The increase in 2000 was due to an increase in software products and sales due to the additional revenue generated from software collaboration contracts and software consulting revenue. Tripos generates a substantial portion of its revenues from the pharmaceutical industry. Net sales to this industry accounted for approximately 52%, 57%, and 62% of total net sales in 1998, 1999, and 2000, respectively.

Net sales from the Company's activities outside of North America represented approximately 48%, 55% and 57% of total net sales in 1998, 1999, and 2000, respectively. Net sales in Europe accounted for 40%, 46% and 47% of net sales in 1998, 1999, and 2000, respectively, with the balance from customers in the Pacific Rim. Tripos believes that revenues from its foreign activities will continue to account for a significant percentage of its total net sales.

List prices for Tripos' software products have remained relatively stable over the last few years. In 1997, Tripos started selling token software licenses in addition to term licenses. A token license includes a minimum level of modules for a minimum total price. In 1998, 1999 and 2000, 38%, 54%, and 40%, respectively of software license sales were sold in the form of a token license. As a result of selling more modules through token licenses, the average software license revenue per customer has increased. The average sale price for chemical compound libraries decreased in 1998 due to the demand for a highly purified product which caused a decline in the size and number of orders based on the availability of purified product for sale. In 1999, Tripos' new product offering which guaranteed greater than 70% purity for every compound, allowed the price per compound to increase as the value of the compounds to customers increased. The need to screen thousands of compounds in lead optimization programs both with Tripos and for internal use by our customers also sustains the value of the LeadQuest compounds. Increasing net sales from period to period is dependent, in part, on Tripos' ability to introduce new products and services, which are accepted by the market, and on Tripos' ability to penetrate new and existing markets. Existing customers represented 85% of total net sales in 1998, 89% in 1999, and 87% in 2000.

Software license sales decreased 6% from $11.6 million in 1998 to $10.9 million in 1999 and increased 19% to $13 million in 2000. The decrease in 1999 was due to weakness of sales to the biotechnology customer base specifically on the West Coast. The increase in 2000 was due to the increase in sales of software consulting services, custom software collaborations, and a 41% increase in software license sales in the Pacific Rim.

Support sales increased 3% from $7.9 million in 1998 to $8.2 million in 1999, and decreased 6% to $7.6 million in 2000. The increase for 1998 and 1999 is primarily due to a larger installed base of customers with more modules per customer as a result of the overall increase in software license sales in the prior years. The decrease in 2000 was due to the decline in the number of perpetual license sales in which support is a separate transaction from the sale of the software license. In the token license arrangement, support is bundled with the software license when priced to the customer and then broken out, for revenue recognition purposes, as a smaller component of the total sale.

Tripos derives Discovery Service revenues from its compound library product, LeadQuest®, and Discovery Contract Research services. Discovery Services sales increased 83% to $5.2 million in 1999 from $2.8 million in 1998 and increased 4% to $5.4 million in 2000. Fluctuations in these sales are attributable to the repositioning of this business from the distribution of compounds manufactured by third parties to the distribution of compounds designed and synthesized with Tripos staff and facilities. Prior to mid-1998, Tripos distributed a series of chemical compounds manufactured by a third party. Since that time, Tripos has constructed a chemistry laboratory facility and produced a library of chemical compounds with the purity and in amounts sufficient to meet Tripos' projected sales needs. In July 2000, Tripos received a one-year, multi-million dollar lead optimization contract with the French pharmaceutical company, Lipha S.A. The revenues from contracted services are included in this business line. See the "Business - Product Development" section of this Form 10-K for further discussion.

Hardware revenues decreased 5% to $3.0 million in 1999 from $3.2 million in 1998 and remained at $3.0 million for 2000. The decrease in 1999 reflects the absence of new models of hardware offered as well as customers' decision to move from Unix based platforms to Windows NT systems.

Cost of Sales. Total cost of sales increased 1% from $6.7 million in 1998 to $6.8 million in 1999, and decreased 14% to $5.8 million in 2000, which represents 26%, 25% and 20%, respectively, of total net sales. The decrease in 2000 was due to the decrease in costs of diverse compound libraries as a result of the decline in sales of compound libraries and the decrease in amortization expense on software product development.

Costs of software licenses represented 21%, 17% and 13% of software license sales in 1998, 1999, and 2000, respectively. Costs of software licenses consist of amortization of capitalized software, royalties to third-party developers, and the cost of software product packaging and media. The cost of software licenses as a percentage of software license sales decreased in 1999 and 2000 due to a decrease in amortization in previously capitalized development costs and a decrease in third-party royalties from the mix of software modules sold.

Costs of support represented 1%, 2% and 2% of support sales in 1998, 1999, and 2000, respectively. Cost of support principally consists of software product packaging, media and updates to documentation. The increase in costs of sales for support in 1999 and 2000 compared to 1998 is due to the costs of the releases of major upgrades to software.

Costs of Discovery Services represented 44%, 37% and 24% of Discovery Service sales in 1998, 1999, and 2000, respectively. The cost of the Discovery Services business is represented by the costs of compound libraries and third-party costs for contract research projects. In 1999 and 2000, the decrease in the costs as a percentage of Discovery Services sales was due to the significant increase in contract research sales. Internal costs to perform contract research services are reflected in R&D.

Costs of hardware represented 91%, 93% and 91% of hardware sales in 1998, 1999 and 2000, respectively. Cost of hardware consists of the costs of hardware sold. The Company expects the cost of hardware as a percentage of hardware sales to remain relatively stable in future periods.

Gross Profit. Gross profit was $18.9 million in 1998, $20.4 million in 1999, and $23.2 million in 2000, which represents gross profits of 74%, 75% and 80%, respectively. The increase in the gross profit margin in 2000 was due to the increase in software collaboration, software consulting service, and contract research sales.

Sales and Marketing Expenses. Sales and marketing expenses decreased 1% from $9.7 million in 1998 to $9.67 million in 1999, and increased 5% to $10.2 million in 2000. The increase in 2000 was due to the increase in marketing costs as the company increases the market awareness of all of Tripos products and services. Sales and marketing expenses as a percentage of net sales decreased from 38% in 1998 to 36% in 1999, and decreased to 35% in 2000. The relative stability of sales and marketing expenses over these periods is due to the existence of an established sales and marketing organization.

Research and Development Expenses. Research and development expenses increased 35% from $6.3 million in 1998 to $8.5 million in 1999, and increased 18% to $10.0 million in 2000, representing 25%, 31%, and 34% of net sales, respectively. The increase in 1999 was due to the increase in chemistry staff at Tripos Receptor Research, shared costs for the collaborations with Arena Pharmaceuticals and the Wolfson Institute, and an increase in staff and facilities for software consulting programmers. The increase in 2000 was a further increase in software consulting programmers and developers to staff existing contracts.

Research and development expenses, including the amount of capitalized costs were $7.6 million in 1998, $10.9 million in 1999 and $13.5 million in 2000 which represents 30%, 40%, and 46% of net sales, respectively. In accordance with Statement of Financial Accounting Standards No. 86 and SOP 98-1, the Company capitalizes software development costs for both external and internal use. Tripos capitalizes compound library production and design costs to inventory. The total amount of costs capitalized were $1.3 million, $2.4 million, and $3.5 million in 1998, 1999 and 2000, respectively. This represented 17%, 22% and 26% of total product research and development expenditures in these periods. Tripos anticipates that its investment in new product research will increase significantly as Tripos continues to develop four new software modules per year, works on funded software development contracts with customers, increases diverse compound library production and performs contract research and software consulting services. 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, variability of staff utilization and of the outcomes from certain of these consulting contracts.

General and Administrative Expenses. General and administrative expenses increased 33% from $4.2 million in 1998 to $5.6 million in 1999 and decreased 1% to $5.5 million in 2000, representing 16%, 20%, and 19% of net sales, respectively. The increase as a percentage of sales in 1999 and 2000 is due to the addition of Tripos Receptor Research administrative staff, worldwide infrastructure and IT expansion, and a bonus reserve. Tripos expects general and administrative expenses to remain at comparable levels to 2000 in the future.

Interest Income. Interest income of $0.47 million in 1998, $0.35 million in 1999, and $0.55 million in 2000 was from interest earned on investments.

Interest Expense. Interest expense of $0.3 million in 1998, $1.0 million in 1999, and $0.65 million in 2000 was from interest due on the long-term note payable for the corporate building, the line-of-credit, the term loan, and interest on capital leases.

Other Income (Expense). Other income (expense) was $1.2 million in 1998, $1.8 million in 1999, and $0.36 million in 2000. In 1998, other income was primarily from the recognition of the guaranteed settlement payment attributable to the transfer by Tripos of the marketing and distribution rights of the Optiverse product to MDS Panlabs. In 1999, other income was primarily from the gain on the sale of all of Tripos' equity holdings in Phase-1 Molecular Toxicology, Inc. In 2000, other income was rental income from tenant space in the corporate headquarters building.

Income Tax Expense (benefit). Tripos' tax expense was $38 thousand in 1998, $274 thousand in 1999, and a tax benefit of ($171) thousand in 2000. The effective tax rate was 35%, (14%), and 8% for 1998, 1999 and 2000, respectively. The effective tax rate in 1999 reflects a 100% valuation allowance on the net operating losses for subsidiaries in the United Kingdom. The tax expense in 1999 is attributable to taxes on net income in the United States, France and Germany. The effective rate in 2000 reflects group tax relief in the UK and the carry-back of U.S. net operating losses against prior years' taxable income. Tripos believes that it will fully utilize these losses to offset future income tax expenses. The estimated tax benefit of these losses, to be realized in a future period, is approximately $2.2 million.

Tripos' working capital increased from $7.5 million in 1999 to $17.1 million in 2000. The increase in working capital was primarily the result of the write-up in market value of the investment in Arena Pharmaceuticals for the amount of the investment that is held as available-for-sale.

Net cash used by operating activities in 2000 decreased to $1.1 million from $1.5 million in 1999. This was due to the increase in deferred revenue of $3.5 million, an increase in amortization of $0.4 million, an increase in depreciation of $1.8 million, a decrease in notes receivable trade of $0.4 million, an increase in accounts payable and accrued expenses of $0.5 million offset by a net loss of $2.1 million, an increase in compound inventories of $2.0 million, an increase in accounts receivable of $1.7 million and an increase in prepaid expenses of $1.3 million. In 1999, net cash used by operating activities increased from $0.4 million in 1998 to $1.5 million. This was primarily due to a decrease in prepaid and other current assets of $1.1 million, an increase in accounts payable and accrued expenses of $1.1 million, an increase in amortization of $0.5 million, an increase in depreciation of $1.7 million offset by a net loss of $2.3 million and an increase in short-term receivables of $1.9 million along with a gain from the disposition of Tripos' equity interest in Phase-1 Molecular Toxicology of $1.6 million.

Net cash used in investing activities decreased from $4.5 million in 1999 to cash provided by investing activities of $0.4 million in 2000. The decrease relates to completion of the build-out of the chemistry facilities at Tripos Receptor Research in 1999 and the collection of notes receivable in 2000 on the sale of Tripos' investment in Phase-1 Molecular Toxicology at the end of 1999. Tripos invests available cash in bank deposits, investment-grade securities and, short-term interest-producing investments, including government obligations and other money market instruments. Tripos anticipates that fiscal 2001 capital purchases will remain constant, as Tripos expenditures are concentrated on maintenance of existing businesses.

Net cash provided by financing activities decreased from $5.1 million in 1999 to $4.8 million in 2000 as Tripos received $9.0 million from LION bioscience AG in the form of a convertible preferred private placement. This investment was partially used to pay down a $4.0 million line of credit and a $1.0 million term loan outstanding with LaSalle Bank. Tripos' proceeds from stock issuance pursuant to stock purchase and option plans increased by $1.1 million in 2000 compared to 1999.

Tripos believes that with its cash, investment in marketable securities, accounts receivable balances, projected cash flow from operations, and availability under a $4 million line-of-credit, it will be able to meet both its liquidity needs and capital expenditure needs for the next twelve months. See Note 12 later in this Annual Report for further discussion of the credit facilities available to Tripos. Tripos may seek to obtain additional financing in the future in connection with its product development efforts and its efforts to penetrate existing and new markets for its products and services. Decisions to access additional capital will reflect projected working capital needs, business expansion needs, possible acquisitions of complimentary business entities, and the availability of attractive financing alternatives.

Tripos' foreign operations transact the majority of their business in their respective local currencies and are generally not exposed to foreign currency gains or losses. Due to the relative stability of the currency of the countries in which it operates and the level of investment in each country, Tripos' current intent is to retain assets within its foreign operations to fund those operations.

Tripos' future results could differ materially from those discussed in this Annual Report. Factors that could contribute to such differences, include, but are not limited to, the following:

Expansion of services and sales activities. Tripos' strategy of providing direct integration of sophisticated information technology with the experimental sciences in the form of chemical laboratories to produce faster, more cost-effective new product discovery has not yet garnered widespread commercial acceptance. This integrated approach also requires Tripos' sales force to broaden their existing knowledge base in selling discovery software to include selling software consulting services and discovery research services. There can be no assurance that the market will accept Tripos' integrated approach or that competitors will not offer other approaches that gain greater technological acceptance.

Future capital needs. Tripos may be required to raise additional capital in the near future to conduct operations through additional public or private equity financings, collaborative arrangements, borrowings or other available sources. There can be no assurance that additional funding, if necessary, will be available on favorable terms, if at all. If additional capital is raised through the sale of equity or securities convertible into equity, the issuance of these securities could result in dilution to our existing stockholders.

Dependence on pharmaceutical and biotechnology industries. Tripos has benefited to date from the increasing trend among pharmaceutical and biotechnology companies to outsource chemical research and development projects. A reversal or slowing down of this trend, a general economic downturn in these industries, could have a material adverse effect on our business, financial condition and results of operations.

Competition. Tripos competes with the research departments of pharmaceutical companies, biotechnology companies, combinatorial chemistry companies, contract research companies and research and academic institutions in size, relative expertise and sophistication, speed and costs of identifying and optimizing potential lead compounds and developing and optimizing chemical processes. These competitors may have greater financial and other resources and more experience than Tripos in certain research and development methods.

Protection of proprietary technology. Tripos' success will depend, in part, on our ability to obtain and enforce patents, protect trade secrets and copyrights, enforce restrictive licenses granted to third parties, obtain licenses to technology owned by third parties when necessary or developed in collaboration with us, and conduct our business without infringing the proprietary rights of others.

Variations in quarterly operating results. Tripos historically has experienced stronger financial performance in the third and fourth quarters of each fiscal year followed by a comparative decline in the first and second quarters. Quarterly operating results may continue to fluctuate as a result of a number of factors, including lengthy sales cycles, market acceptance of new products and upgrades, timing of new product introductions, changes in pricing policies, changes in general economic and competitive conditions, seasonal slowdowns, and the timing and integration of acquisitions.

Dependence on collaborators. Tripos' commercial success depends on its ability to enter into joint venture or other collaborative arrangements with third parties. To date, we have entered into numerous such arrangements with large pharmaceutical companies and emerging biotechnology companies. There can be no assurance that we will be able to continue to establish these collaborations, that any such collaborations will be on favorable terms, or that current or future collaborations will ultimately be successful.

Dependence on key personnel. Tripos' future success depends to a significant degree upon the continued service of key technical and senior management personnel, in particular, its President and Chief Executive Officer, Dr. John P. McAlister, as well as key technical personnel on the software and laboratory side. None of our key personnel is bound by an employment agreement or covered by an insurance policy where Tripos is the beneficiary. The loss of one or more key members could have a material adverse effect on the Company's business, financial condition and results of operations.

Competitive market for experienced scientists and programmers. Tripos competes with the research departments of pharmaceutical companies, biotechnology companies, combinatorial chemistry companies, contract research companies and research and academic institutions for new scientific personnel. We compete with consulting companies for experienced computer programmers to carry out our software consulting services. We cannot assure that we will continue to be successful in attracting and retaining qualified personnel should the worldwide demand for these skilled individuals increase.

Potential adverse impact of pharmaceutical and health care reform. Tripos expects that a substantial portion of its revenues in the foreseeable future will be derived from services provided to the pharmaceutical and biotechnology industries. If legislative proposals or reforms are adopted that have a material adverse effect on the businesses, financial condition, and results of operations of pharmaceutical and biotechnology companies that are actual or prospective customers, Tripos' business, financial condition and results of operations could be materially and adversely effected as well.

Tripos' exposure to market risks is limited to foreign exchange variances and fluctuations in interest rates. Neither foreign exchange nor interest rate exposure has resulted in a material impact on Tripos.

Tripos' foreign exchange risk is presently limited to currencies that historically have exhibited only minor fluctuations. Assets outside the United States are primarily located in England. Tripos' investments in foreign subsidiaries with a functional currency other than the U.S. dollar are not hedged. The net assets in foreign subsidiaries translated into U.S. dollars using the year-end exchange rates were approximately $5.3 million and $8.4 million at December 31, 1999 and 2000, respectively. The potential loss in fair value resulting from a hypothetical 10% adverse change in foreign currency exchange rates would be approximately $0.53 million and $0.84 million at December 31, 1999 and 2000, respectively. Any loss in fair value would be reflected in Other Comprehensive Income and would not impact Tripos' net income. Tripos' foreign currency transaction gains and losses for 1999 and 2000 were immaterial.

Tripos' interest rate risk is attributable to its outstanding borrowings under its line-of-credit and mortgage loan. Tripos has fixed its floating rate interest risk on the mortgage loan through the purchase of a swap instrument. Tripos will continue to monitor its exposure to floating interest rate risk on outstanding line-of-credit borrowings and endeavor to mitigate this risk through the use of appropriate hedging instruments.

Share amounts reflect 2-for-1 stock split effective February 5, 2001 for holders of record on January 12, 2001.

Effective June 1, 1994, Evans and Sutherland Computer Company ("E&S"), the former parent of Tripos, distributed all outstanding shares of the common stock of the Tripos (formerly Tripos Associates, Inc.) to E&S shareholders ("the Distribution") such that every three shares of E&S yielded one share of the Company. Shortly before the Distribution, we changed our company name to Tripos, Inc.

Tripos assesses the recoverability of capitalized development costs by comparing the remaining unamortized balance to the net realizable value of the related product. Any excess is written off. All other research and development expenditures are charged to research and development expense in the period incurred.

Effective January 1, 1998, we adopted AICPA's Statement of Position 98-1 ("SOP 98-1") which requires capitalization of certain costs incurred in connection with developing or obtaining internal use software. Capitalized costs are amortized over the lesser of three years or the remaining useful life of the software.

The components of accumulated other comprehensive income, net of related tax, at December 31, 2000 and December 31, 1999 are as follows:

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2.  Property and Equipment

Property and equipment at the end of each year are summarized below:

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Accrued expenses consist of the following at the end of each year:

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The components of income (loss) before income taxes for the years ended were as follows:

The components of income tax expense (benefit) for the years ended were as follows:

The difference between the effective income tax rate and the U.S. federal income tax rate for the years ended is explained as follows:

The tax effects of temporary differences that give rise to deferred tax assets and liabilities at the end of each year are summarized as follows:

Income tax payments for 2000, 1999 and 1998 were $60, $123, and $361, respectively.

Three of the Tripos' foreign subsidiaries had loss carryforwards at December 31, 2000, totaling approximately $7,554 that have no expiration date. Undistributed earnings of subsidiaries outside the United States are considered to be permanently invested. Accordingly, no provision for U.S. income taxes was made for undistributed earnings of such subsidiaries, which aggregated $535 at December 31, 2000.

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In 1994, Tripos adopted the 1994 Employee Stock Purchase Plan, that allows eligible employees to purchase stock at the lower of 85% of the fair market value of the stock on the enrollment date or exercise date as defined by the plan. Pursuant to the plan, employee purchases are limited to 10% of compensation. The plan, which was amended in 1998 to raise the number of shares reserved for issuance from 300 to 700 shares, is in effect for ten years unless terminated or amended sooner by the Board of Directors. At December 31, 2000, 543 shares have been purchased under this plan.

In 1994, Tripos adopted the 1994 Stock Plan that is administered by the Compensation Committee and provides for incentive stock options, nonstatutory stock options and stock purchase rights to be granted to our employees and consultants. Pursuant to the plan, incentive stock options can be exercised at a price which is not less than the fair value of the stock on the grant date, and nonstatutory stock options and stock purchase rights can be exercised at a price which is determined by the Compensation Committee. The Compensation Committee is responsible for establishing the period over which options and rights can be exercised. Options vest at the rate of 25% on the first anniversary of each grant and 1/48th per month over the next three years. All options granted have 10-year terms. The plan, which was amended in 1998 to increase the number of shares of common stock reserved for issuance from 2,200 to 2,560, is in effect for ten years unless terminated or amended sooner by the Board of Directors.

In 1994, Tripos adopted the 1994 Director Option Plan that provides for nonstatutory stock options to be granted to non-employee directors at the fair market value of the stock at the date of grant. Options can be exercised in 25% increments on the anniversary of its date of grant. The plan, which was amended in 1998 to decrease the number of shares of common stock reserved for issuance from 600 to 480, is in effect for ten years unless terminated or amended sooner by the Board of Directors.

Tripos has elected to follow APB 25, "Accounting for Stock Issued to Employees", and related interpretations in accounting for its employee and director stock options because, as discussed below, the alternative fair value accounting provided for under SFAS 123, "Accounting for Stock-Based Compensation", requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of our employee and director stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.

Pro-forma information regarding net income and earnings per share is required by SFAS 123 and has been determined as if Tripos had accounted for its employee and director stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rates ranging from 4.26% to 5.65% for 1998, 4.96% to 6.03% for 1999, and 5.83% to 6.80% for 2000; volatility factor of 0.94 for 1998, 0.90 for 1999 and 0.92 for 2000; and a weighted average expected life of the option of 4.2 years for 1998, 5.3 years for 1999, and 4.5 years for 2000. For the Tripos Employee Stock Purchase Plan, compensation expense was also estimated using a Black-Scholes option pricing model with the following assumptions: risk-free interest rates ranging from 5.36% to 5.65% for 1998, 4.96% to 6.03% for 1999, and 5.83% to 6.80% for 2000; volatility factors of 0.94 for 1998, 0.90 for 1999, and 0.92 for 2000; and a weighted average expected life of the option of 6 months. For all years presented, we used a dividend rate of zero.

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because Tripos' employee and director stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee and director stock options.

For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. Tripos' pro forma information follows (in thousands except for earnings per share information):