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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549




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FORM 10-K



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(Mark one)

|  |  |                                                                                     
|- |  | ------------------------------------------------------------------------------------
|x |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2003 or

|  |  |                                                                                         
|- |  | ----------------------------------------------------------------------------------------
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from ______________ to ______________

Commission File Number 000-30231




TANOX, INC.

(Exact name of registrant as specified in its charter)


|                                |  |                                     
|------------------------------- |  | ------------------------------------
|Delaware                        |  | 76-0196733                          
|(State or other jurisdiction of |  | (I.R.S. Employer Identification No.)
|incorporation or organization)  |  |                                     

10301 Stella Link, Houston, Texas 77025
(Address of principal executive offices)

713-578-4000
(Registrants telephone number, including area code)






| |  | Securities Registered Pursuant to Section 12(b) of the Act: None                        
| |  | ----------------------------------------------------------------------------------------
|
| |  | Securities Registered Pursuant to Section 12(g) of the Act: Common Stock,
$.01 par value

| |  |  | Preferred Share Purchase Rights
| |  |  | -------------------------------

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  o

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 this Form 10-K or any
amendment to this Form 10-K. x

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes x No o

The aggregate market value of the registrants common stock held by
nonaffiliates as of June 30, 2003 was $486,482,822.

Number of shares of outstanding common stock as of March 10, 2004:
43,941,226.

DOCUMENTS INCORPORATED BY REFERENCE

The information called for by Items 10, 11, 12 and 13 of Part III will be
included in the registrants definitive proxy statement to be filed pursuant to
Regulation 14A and is incorporated herein by reference.



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TABLE OF CONTENTS



|                                                   |                                                                                               |                                 |  |  |  |  |  | 
|-------------------------------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------- |  |  |  |  |  | 
|PART I                                            
|                                                   | ITEM 1. Business                                                                             
|                                                   | ITEM 2. Properties                                                                           
|                                                   | ITEM 3. Legal Proceedings                                                                    
|                                                   | ITEM 4. Submission of Matters to a Vote of Security Holders                                  
|PART II                                           
|                                                   | ITEM 5. Market for the Companys Common Equity and Related Stockholder Matters               
|                                                   | ITEM 6. Selected Financial Data                                                              
|                                                   | ITEM 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                   |                                                                                               | Overview                       
|                                                   |                                                                                               | Critical Accounting Policies   
|                                                   |                                                                                               | Results of Operations          
|                                                   |                                                                                               | Liquidity and Capital Resources
|                                                   | ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk                          
|                                                   | ITEM 8. Financial Statements and Supplementary Data                                          
|                                                   | ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|                                                   | ITEM 9A. Controls and Procedures                                                             
|PART III                                          
|                                                   | ITEM 10. Directors and Executive Officers of the Registrant                                  
|                                                   | ITEM 11. Executive Compensation                                                              
|                                                   | ITEM 12. Security Ownership of Certain Beneficial Owners and Management                      
|                                                   | ITEM 13. Certain Relationships and Related Transactions                                      
|                                                   | ITEM 14. Principal Accounting Fees and Services                                              
|PART IV                                           
|                                                   | ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                     
|SIGNATURES                                        
|Index to Exhibit                                  
|List of Subsidiaries of the Registrant            
|Consent of Independent Auditors                   
|Information re Consent of Arthur Andersen LLP     
|Certification of CEO Pursuant to Section 302      
|Certification of VP of Finance Pursuant to Sec.906
|Cert.of CEO & VP of Finance Pursuant to Sec. 906  



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TABLE OF CONTENTS

|           |  |                                                                                       |      |   
|---------- |  | ------------------------------------------------------------------------------------- | ---- | --
|           |  |                                                                                       | Page
|           |  |                                                                                       |     
|           |  | PART I                                                                                |      |   
|ITEM 1.    |  | Business                                                                              |      | 1 
|ITEM 2.    |  | Properties                                                                            |      | 26
|ITEM 3.    |  | Legal Proceedings                                                                     |      | 27
|ITEM 4.    |  | Submission of Matters to a Vote of Security Holders                                   |      | 28
|           |  | PART II                                                                               |      |   
|ITEM 5.    |  | Market for the Companys Common Equity and Related Stockholder Matters                |      | 29
|ITEM 6.    |  | Selected Financial Data                                                               |      | 30
|ITEM 7.    |  | Managements Discussion and Analysis of Financial Condition and
Results of Operations |      | 31
|           |  | Overview                                                                              |      | 31
|           |  | Critical Accounting Policies                                                          |      | 31
|           |  | Results of Operations                                                                 |      | 32
|           |  | Liquidity and Capital Resources                                                       |      | 34
|ITEM 7A.   |  | Quantitative and Qualitative Disclosures About Market Risk                            |      | 36
|ITEM 8.    |  | Financial Statements and Supplementary Data                                           |      | 37
|ITEM 9     |  | Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure  |      | 62
|ITEM 9A.   |  | Controls and Procedures                                                               |      | 62
|           |  | PART III                                                                              |      |   
|ITEM 10.   |  | Directors and Executive Officers of the Registrant                                    |      | 63
|ITEM 11.   |  | Executive Compensation                                                                |      | 63
|ITEM 12.   |  | Security Ownership of Certain Beneficial Owners and Management                        |      | 63
|ITEM 13.   |  | Certain Relationships and Related Transactions                                        |      | 63
|ITEM 14.   |  | Principal Accounting Fees and Services                                                |      | 63
|           |  | PART IV                                                                               |      |   
|ITEM 15.   |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                       |      | 64
|SIGNATURES |  |                                                                                       |      | 66



| |                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------
| | In this report, Tanox, we, us and our refer to Tanox, Inc.
Common Stock refers to Tanoxs common stock, par value $0.01 per share.
|
| | Xolair® (omalizumab) anti-IgE antibody is a trademark of Novartis AG.                                                                       

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PART I




ITEM 1. Business

Overview

Tanox discovers and develops therapeutic monoclonal antibodies to address
significant unmet medical needs in the areas of asthma, allergy, inflammation,
diseases affecting the human immune system and infectious diseases. Tanoxs
products are genetically engineered antibodies that target a specific molecule
or antigen.

Our
first product, Xolair® (omalizumab), was developed in collaboration
with Genentech, Inc. and Novartis Pharma, A.G. Xolair received U.S. Food and
Drug Administration (FDA) marketing approval on June 20, 2003, and was launched
in the U.S. in July 2003. Xolair is currently labeled for treatment of adults
and adolescents (12 years of age and above) with moderate-to-severe persistent
asthma who have a positive skin test or in vitro reactivity to a perennial
aeroallergen and whose symptoms are inadequately controlled with inhaled
corticosteroids. Xolair is an anti-immunoglobulin E, or anti-IgE, antibody
that has been shown to decrease the incidence of asthma exacerbations in these
patients. Safety and efficacy have not been established in other allergic
conditions. Genentech, Novartis and Tanox expect to initiate clinical trials
in 2004 to test the safety and efficacy of Xolair to treat pediatric asthma
patients and peanut allergy patients.

We are currently developing TNX-355, an anti-CD4 monoclonal antibody with
a novel mechanism of action, for treating HIV-infected patients. We have
completed a single-dose 30-patient, Phase 1a trial and a multiple-dose
22-patient, Phase 1b trial with TNX-355. A randomized Phase 2 trial to
optimized background therapy (OBT) plus TNX-355 or to OBT alone is planned to
start in the first half of 2004. In addition, we have active preclinical
research programs aimed at developing novel therapeutic antibodies to treat
intrinsic asthma, complement mediated diseases and osteoporosis.

Our Strategy

Our objective is to become a profitable, fully integrated
biopharmaceutical company by developing, manufacturing and marketing innovative
monoclonal antibody products for the treatment of asthma, allergy, diseases of
the immune system, infectious diseases and other related diseases. Key aspects
of our corporate strategy include the following:



| |  | Expand the indications for Xolair.We continue our efforts to expand
the market opportunity for Xolair in collaboration with Genentech and
Novartis. We are currently working with our partners in the planning
of clinical trials of Xolair in pediatric asthma and peanut allergy.
Through a Phase 2 trial using another anti-IgE antibody, TNX-901, we
have validated that anti-IgE treatment may be effective to protect
patients suffering from peanut allergy.                                                                                                
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Advance Our Product Pipeline.We recently completed Phase 1a and
Phase 1b trials with TNX-355 in HIV-infected patients. The data from
the two trials showed that TNX-355 was well tolerated, without
evidence of CD4 cell depletion. We expect to start a double blinded,
randomized, placebo controlled Phase 2 clinical trial in the first
half of 2004 to further evaluate the safety and efficacy of TNX-355.
If the data from this Phase 2 trial is positive, we may advance the
product into Phase 3 clinical trials and develop a commercialization
strategy.
| 
| |  | Expand Our Product Pipeline Through Acquisition and Licensing.In
addition to our internal development efforts, we plan to selectively
license and acquire product opportunities and businesses                                                                                                                                                                                                                                                                                                                                                                     

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|  |  | that complement our product pipeline and technology platform. We believe
that we are well positioned to attract in-licensing and acquisition
candidates as a result of our expertise in monoclonal antibody technology
and our strong financial position.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Advance the Development of Our Preclinical Product Candidates.We
plan to advance our preclinical product candidates into clinical
trials for the treatment of asthma, allergy, inflammatory diseases,
immunological and infectious diseases.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| 
| |  | Form Strategic Collaborations to Support Development and
Commercialization of Our Products.To enable us to develop products
and to mitigate risk, we may deem it advantageous to partner with
other pharmaceutical and biotech companies. These partnerships could
allow us to obtain funding for our development, manufacturing and
marketing activities, thereby reducing the substantial financial
investment that is required to develop our products. They could
provide us with domestic and international marketing and sales
expertise for our partnered products. To the extent economically
feasible, we expect to retain strategically important development,
manufacturing or marketing rights in order to maximize the value of
our drug development opportunities.
| 
| |  | Expand Our Biologics Manufacturing Capability.To support our future
clinical manufacturing and commercial supply needs, we are
investigating construction or acquisition of a new biologics
manufacturing facility, as well as other alternatives for
manufacturing capacity, that can supply drugs for our clinical trials
and initial commercial launches.                                                                                                                                                                                                                                                                                                                                                                                                                    

Monoclonal Antibodies

Monoclonal antibodies represent an exciting area of therapeutic product
development. Genetically engineered monoclonal antibodies are man-made
antibodies that target a specific antigen. Most monoclonal antibodies are
derived from animals such as mice. Advances in antibody design technologies
have enabled scientists to develop humanized (human-like) and fully human
antibody products that can be administered to patients on a chronic basis with
reduced concern for being recognized as foreign and triggering adverse
responses by the human immune system. Advances in antibody production
technologies, such as high productivity fermentation and experimental
technologies such as transgenic plants and animals, have enabled manufacturers
to produce antibody products more cost-effectively. Because of these advances,
many monoclonal antibodies have already been approved for marketing as
therapeutics by the FDA, and a large number of monoclonal antibodies are
currently undergoing clinical and preclinical investigation.

Our drugs target various elements or malfunctions of the immune system
underlying the cause of diseases. We have designed drugs to deactivate or
reduce the activity of the immune system for diseases caused by over-activation
or inappropriate activation of immune responses, such as autoimmune and
allergic diseases and inflammation. We also have designed drugs to activate
the immune system for treatment of diseases where boosting immune protection is
desirable, such as HIV/AIDS. Our products have either resulted from internal
research or were in-licensed or acquired.

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Marketed Product  Xolair

Xolair, the first anti-IgE antibody to reach the market, is also Tanoxs
first commercial product. Xolair was approved by the FDA on June 20, 2003.
Xolair generated approximately $25 million of sales in the U.S. in 2003. The
current approved label for Xolair is for treatment of adults and adolescents
(12 years of age and above) with moderate-to-severe persistent asthma who have
a positive skin test or in vitro reactivity to a perennial aeroallergen and
whose symptoms are inadequately controlled with inhaled corticosteroids.
Xolair has been shown to decrease the incidence of asthma exacerbations in
these patients. Safety and efficacy have not been established in other
allergic conditions.

Mechanism of Action of Xolair

Xolair is a recombinant humanized monoclonal antibody targeting IgE, one
of the key inflammatory proteins implicated in allergic diseases such as
asthma, allergic rhinitis and food allergy. In allergic diseases, the immune
system responds to the antigen, or allergen in this case, by producing IgE.
IgE binds to the surface of mast cells and basophils through high affinity IgE
receptors on the cell surface. These cells, which are found in tissue and also
circulate in the blood, contain or can produce chemicals such as histamine and
leukotrienes, which induce inflammation. The first time an allergy-prone
person is exposed to an allergen, he or she makes IgE specific to that
allergen. These IgE molecules circulate in the blood stream and find their way
to attach to the mast cells or basophils, thereby arming these cells. When a
mast cell or basophil armed with allergen specific IgE on its surface again
comes in contact with its specific allergen, the allergen will bind to the
specific IgE molecules, with resultant cross-linking of the underlying
receptors on the cell surface. This event signals the mast cell or basophil to
release its powerful chemicals, causing tissue inflammation and asthma and
allergy symptoms, including wheezing, coughing, sneezing, runny nose, watery
eyes and itching. Xolair binds to circulating IgE, masking the binding site
for the IgE receptor and thereby preventing IgE from binding to and arming mast
cells and basophils. In this fashion, Xolair blocks or inhibits the allergic
response. In addition, Xolair also reduces the high-affinity IgE receptors on
mast cells, basophils and dendritic cells, further inhibiting the allergic
pathway.

Market Opportunity  Moderate to Severe Allergic Asthma

Asthma makes breathing difficult and is potentially life threatening.
Approximately 35.6 million people in the top seven global markets (France,
Germany, Italy, Spain, the United Kingdom, Japan and the United States) suffer
from asthma. Approximately two-thirds of these patients have allergic asthma.
In the United States, there are 17 million asthmatics, of which approximately
10 million receive treatment. Of the 10 million Americans treated for asthma,
approximately 8.5 million patients are age 12 and above, and 5.1 million of
these 8.5 million patients have the allergic form of the disease. Of these,
4.2 million have IgE levels and body weight that fit within the dosing
algorithm for Xolair, 1.9 million of these patients have moderate-to-severe
asthma and 500,000 of them are uncontrolled by current medications. Xolair is
being initially targeted to this very sick patient population of 500,000.
In addition, there are approximately 1.0 million pediatric asthma patients (below age of 12)
who are receiving various treatments. Clinical trials in pediatric asthma will
be initiated in 2004.

Commercialization Status

Genentech and Novartis launched Xolair in the U.S. in July 2003, with a
250 person sales force (125 sales representatives from each company). This
sales force is targeting sales and marketing efforts to allergists and
pulmonologists who specialize in the treatment of asthma. Xolair is being
distributed by a network of five specialty pharmacies: Caremark Rx, CuraScript
Pharmacy, Nova Factor, Option Care and Priority Healthcare.

Xolair generated approximately $25 million in U.S. sales in 2003 in its
first six months on the market. Broad insurance coverage for Xolair has been
secured. Xolair has also seen success in securing

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Medicare and Medicaid reimbursement, with all Medicare carriers and 49
state Medicaid programs now covering Xolair.

Xolair has also been approved for marketing in Australia, and the filing
of an application with the European Agency for the Evaluation of Medicinal
Products (EMEA) for allergic asthma is expected to be submitted in the first
half of 2004.

Clinical Study Results

The clinical studies that provided the basis for marketing approval by the
FDA include three randomized, double-blind, placebo-controlled, multicenter
asthma trials. The trials enrolled patients 12 to 76 years old, with moderate
to severe persistent (based on criteria established by the National Heart Lung
and Blood Institute) asthma for at least one year, and a positive skin test
reaction to a perennial aeroallergen. Studies 1 and 2 enrolled 525 and 546
patients, respectively with approximately equal numbers of patients in the
Xolair and placebo groups. All patients were symptomatic and were being treated
with inhaled corticosteroids (ICS) and short acting beta-agonists. Study 3
patients were receiving at least 1000 μ181;g/day fluticasone propionate and a
subset was also receiving oral corticosteroids. The studies included a 16 week
steroid stable phase followed by a 12 week steroid reduction phase. In the
steroid stable phase, patients received Xolair plus unchanged ICS dose unless
an acute exacerbation necessitated an increase. During the steroid reduction
phase, ICS dose were reduced in a step-wise manner.

Overall, the studies showed that Xolair reduces exacerbation in many
patients when added to ICS during the steroid stable phase of the 2 pivotal
trials (Study 1 and 2). The mean number of exacerbations per patient was
reduced in patients treated with Xolair compared with placebo. During the
16-week stable steroid phase, in Study 1 the mean number of exacerbations in
the Xolair group was 0.2 and in the placebo group 0.3 (p=0.005), and in Study
2, the mean numbers of exacerbations were 0.1 and 0.4, respectively
(pμ060;0.001). During the steroid reduction phase of the trials, the studies
showed that Xolair reduced exacerbations in many patients. The mean number of
exacerbations per patient were fewer with Xolair by the end of the
steroid-reduction phase of both trials. In Study 1, the mean number of
exacerbations in the Xolair group was 0.2 and in the placebo group 0.3
(p=0.004), and in Study 2, the mean numbers were 0.2 and 0.3, respectively
(pμ060;0.001).

In Study 3, the number of exacerbations in patients treated with Xolair
was similar to that in placebo-treated patients. The absence of an observed
treatment effect in Study 3 may be related to differences in the patient
population compared with Studies 1 and 2, study sample size, or other factors.
In all three studies most exacerbations were managed in the out-patient setting
and the majority were treated with systemic steroids.

Exacerbation reductions were accompanied by improved asthma symptom
scores. Nocturnal, daytime and total asthma symptom scores were lower in
Xolair-treated patients in the steroid stable and steroid reduction phases of
both Study 1 and 2. The clinical relevance of the treatment-associated
differences is unknown.

Adverse Events.The most serious adverse reactions occurring in clinical
studies with Xolair were malignancies and anaphylaxis. The observed incidence
of malignancy among Xolair-treated patients was numerically higher than among
patients in control groups; however, the difference was not statistically
significant and the data does not show long term treatment with Xolair had a
higher occurrence of cancer. Anaphylactic reactions were rare but temporally
associated with Xolair administration. The adverse reactions most commonly
observed among patients treated with Xolair included injection site reaction,
viral infections, upper respiratory tract infection, sinusitis, headache and
pharyngitis. These events were observed at similar rates in Xolair-treated
patients and control patients. These were also the most frequently reported
adverse reactions resulting in clinical intervention (e.g., discontinuation of
Xolair, or the need for concomitant medication to treat an adverse reaction).

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Drugs in Development

Xolair

Genentech and Novartis plan to start Xolair clinical trials in pediatric
allergic asthma and peanut allergy in 2004. In addition, Novartis completed an
additional clinical trial in at risk allergic asthma patients (those
hospitalized for asthma within the past year) in Europe.

Peanut allergy affects approximately 1.5 million people in the U.S., with
approximately 100,000 people having a history of peanut allergy, 50 to 100 of
whom die each year from unintended ingestion of foods containing peanuts or
peanut derived ingredients. Current treatment is avoidance of peanuts and
peanut oil, which is used in preparation of many food products. Complete
avoidance requires constant vigilance and is difficult because prepared food
labeling does not always identify peanut-derived ingredients. Accidental
exposures can result in serious allergic reactions and sometimes death.
Patients with severe peanut allergy take antihistamines to prevent reactions to
accidental exposure and may require administration of epinephrine for severe
anaphylactic reactions. A Phase 2 clinical trial using another anti-IgE
antibody, TNX-901, showed statistically significant data that anti-IgE
antibodies increase up to ten-fold a patients threshold sensitivity to peanuts
in a dose responsive manner. A Phase 2 clinical trial using Xolair is planned
to study its effectiveness in the treatment of peanut allergy.

Anti-CD4 Development  TNX-355

TNX-355 is a humanized anti-CD4 monoclonal antibody that we are developing
for treatment of human immunodeficiency virus or HIV. The virus enters the
host cell by binding to the CD4 receptors on these cells. In laboratory
studies, TNX-355 binds to the CD4 receptor on the cell surface and prevents
viral entry into the cell, thereby blocking cellular infection. Because it
binds to a region of the CD4 molecule that is not involved with normal immune
function, laboratory studies show that TNX-355 does not suppress immune
function in monkeys nor in human blood cells. Furthermore, the antibody does
not deplete CD4 cells in animals or human blood cells in vitro. We have
exclusive worldwide rights to TNX-355 through a license with Biogen IDEC, Inc.

Market Opportunity. According to the World Health Organization, HIV
infects approximately 1.5 million people in North America and Western Europe.
A number of drugs targeting viral replication are being used to treat the
disease, often in combination with others. About 30% of the patients treated
with drug combinations no longer respond to the treatment since their HIV has
become drug resistant. In addition, many drug combinations produce a variety
of undesirable side effects.

Development Status and Clinical Results.In an open-label, single-dose,
dose-escalating Phase 1a safety study in 30 HIV-infected patients (J Infect
Dis, 2004;189:286-291), TNX-355 demonstrated dose-responsive decreases in viral
load, with greater than one log10 decreases in viral load observed at the 10
and 25 mg/kg dose. The drug was well tolerated in all dose groups
(0.3 - 25 mg/kg). We have also completed a multiple-dose Phase 1b trial in 22
HIV-infected patients to further evaluate the drugs safety and effectiveness
in reducing HIV-1 virus load. The results were presented at the
11th
Conference on Retroviruses and Opportunistic Infections in San Francisco on
February 11, 2004. In this open-label trial, patients were on a failing HAART
(highly active anti-retroviral therapy) regimen or on no other antiretroviral
therapy and received one of three different regimens of TNX-355 (10 mg/kg
weekly, 6 mg/kg biweekly after a 10 mg/kg loading dose, and 25 mg/kg biweekly)
for 8-9 weeks. Transient, clinically important (3 0.5  1.7 log10)
reductions in viral load were observed in all but one patient and 64% of
patients experienced at least a 1.0 log10 (90%) decrease in viral load. This
study continued to demonstrate the tolerability and anti-retroviral activity of
TNX-355 observed in the Phase 1a study. As has been seen with other
anti-retroviral agents when tested as monotherapies (either as a single therapy
or in combination with failing drug regimens), the viral load recovered despite
continued administration of TNX-355, and an assessment of therapeutic
potential requires evaluation of the drug in combination with

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other antiretroviral agents. Subject to drug availability, we expect to begin
a Phase 2 study of TNX-355 in combination with optimized background therapy in
antiretroviral therapy-experienced patients in the first half of 2004. On
October 6, 2003, the FDA granted fast track status designation to TNX-355.

Our Research Programs

We are committed to identifying new drugs for treating asthma, allergies,
inflammation,other diseases affecting the human immune system and infectious
diseases. A cornerstone of our discovery effort is our Monoclonal Antibody
Development Platform (MADP) which is a semi-automated, high-throughput system
that gives us the capability to identify and optimize individual monoclonal
antibody leads in a 12-18 month timeframe. The resulting biologic drug
candidates are humanized to reduce the possibility of immunogenicity, which
could lead to decreased activity and tolerability in patients. Our antibodies
are also optimized for affinity, effector function and circulating half-life to
enhance their therapeutic potential.

Our monoclonal antibody therapeutics treat disease by altering the
function of a specific disease-causing protein, called a drug target. We
select drug targets that are well-established in the scientific community, as
well as novel drug targets that are proprietary to Tanox. The latter process
involves genome-wide expression profiling, proteomics, bioinformatics and
transgenic mouse technologies. Once a new target has been identified and its
relevance to disease has been confirmed, or validated, MADP is used to generate
proprietary monoclonal antibody drug candidates. Our research focuses on
immune disorders and infectious diseases and understanding of specific
indications at the molecular level to identify superior drug targets and
biomarkers. We have the following product candidates in preclinical
development and research:

|                             |  |                              |  |            
|---------------------------- |  | ---------------------------- |  | -----------
|Target                       |  | Indication                   |  | Status     
|                             |  |                              |  |            
|Allergic mediator            |  | Atopic dermatitis            |  | Preclinical
|Complement Factor D          |  | Accute inflammatory disease  |  | Preclinical
|Cytokine                     |  | Intrinsic asthma             |  | Preclinical
|Complement C5a               |  | Inflammatory disease         |  | Research   
|Cytokine                     |  | Systemic lupus erythematosus |  | Research   
|Osteoblast signaling pathway |  | Osteoporosis/bone fracture   |  | Research   

These antibody candidates include inhibitors of complement system targets
for various inflammatory indications, antagonists of two distinct
pro-inflammatory cytokine targets for non-allergic asthma and systemic lupus
erythematosus, and an inhibitor of a proprietary cell signaling target for the
treatment of diseases that result from reduced bone mineral density, such as
osteoporosis. Initial validation of the latter target was accomplished in
connection with the establishment of a cross-license agreement between Tanox
and Wyeth, a US-based pharmaceutical and health care products company.
Additional research and development efforts are in progress to generate
potential product candidates for the treatment of bone fracture and
osteoporosis.

Collaboration and Licensing Agreements

Collaboration with Novartis and Genentech

Our lead product, Xolair, was the result of a three-party collaboration
with Novartis and Genentech. In 1990, we established a collaboration with
Novartis to jointly develop anti-IgE antibodies to treat allergic diseases. In
connection with the settlement of a lawsuit in 1996, Genentech joined the
collaboration for the purpose of developing certain anti-IgE antibodies. In
February 2004, we finalized the detailed terms of this three-party
collaboration, which provides for the following:

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| |  | Development.Novartis or Genentech are responsible for conducting
clinical trials and obtaining the regulatory approval for Xolair and
the other anti-IgE products developed through the collaboration in the
U.S. and Europe, and they share all related development costs. We
have primary development responsibility for collaboration products in
China, Hong Kong, Korea, Singapore and Taiwan (East Asia), and we and
Novartis equally share these development costs. Novartis is
responsible for development and associated costs in the rest of the
world.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Manufacturing.Novartis and Genentech are responsible for
manufacturing Xolair and other selected anti-IgE products worldwide.
In consideration for relinquishing any rights to manufacture up to 50%
of the worldwide requirements of those products, we will receive
quarterly payments from Novartis or Genentech based on the quantity of
product manufactured.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| 
| |  | Marketing.Novartis and Genentech share U.S. marketing rights and
have each dedicated an equal number of sales representatives to
promote Xolair in the U.S. Novartis has marketing rights outside the
U.S.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| 
| |  | Milestone Payments.We may receive up to an additional $25.0 million
in Xolair-related milestone payments of which $7.2 million would be
payable to our former attorneys under an adverse arbitration ruling and $2.5 million would be creditable
against future royalty payments. If a second drug were to be
developed under the collaboration, we could be eligible for additional
milestone payments of $10.5 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| 
| |  | Royalties and Profit Sharing.In the United States, we receive
royalties on sales of Xolair and other collaboration products and will
receive a share of Novartis profits on these sales. We also receive
royalties on sales of Xolair and other collaboration products outside
the U.S. We share equally with Novartis the net profits and net
losses from sales of Xolair and other collaboration products in East
Asia. These royalty and profit-sharing payments will be net of
certain milestone and other credits, which, at December 31, 2003,
approximated $6.1 million. In addition, as a result of an adverse arbitration award, 10% of all royalties received by Tanox on sales of
Xolair and certain other anti-IgE products will be payable to our former
attorneys, up to a maximum of $300 million. We expect that the net
amount Tanox will receive from Xolair royalties, before giving effect to the
foregoing credits (but taking into account the amount payable to the
former attorneys) will be in the range of 8% to 12% of net sales
depending on the sales level achieved and geographic distribution of
Xolair sales. We expect that credits will cause the net amount
that Tanox receives from Xolair royalties to be below 8% of net sales in 2004.

Either Novartis or Genentech may withdraw from the collaboration, and, in
such case, rights to Xolair and any other products developed by the
collaboration revert to us and the remaining collaborator (or, if Genentech is
the withdrawing party, to F. Hoffman-La Roche Ltd., if Roche exercises its
option to do so), depending on which party shares rights with the withdrawing
collaborator in a particular territory.

In addition to the collaboration described above, we and Genentech are
parties to a cross-license agreement under which each has an option to license
the other partys patents that are necessary for the manufacture, use or sale
of certain anti-IgE antibodies. This option may be exercised at any time if
either party chooses to independently develop a product that does not fall
within the collaboration, if our collaboration with Novartis and Genentech
terminates, or if we and Genentech may mutually agree.

We are also party to an Amended and Restated Development and Licensing
Agreement with Novartis under which we have agreed to collaborate on anti-IgE
antibodies that do not fall within the three-party collaboration and, in
general, are either (i) invented and synthesized by Tanox or (ii) invented and
synthesized by Novartis and derived from a Tanox antibody or would infringe
certain Tanox patent rights.

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Other License Agreements

Biogen IDEC.In 1998, we entered into an agreement to license from
Biogen, Inc. (now Biogen IDEC, Inc.) its anti-CD4 monoclonal antibody and
intellectual property on an exclusive worldwide basis with limited sublicensing
rights. Biogen owns issued U.S., European, Canadian and Australian patents and
has pending applications in Japan, which cover our TNX-355 product. We agreed
to make royalty payments to Biogen based on annual net sales levels. In
addition to royalty payments, we may make up to an aggregate of $1.4 million
(which could be increased to an aggregate of $10.4 million in the event we
merge or affiliate with a company of similar size to Biogen) in product license
fees and development milestone payments under this agreement, of which we have
paid $200,000. The license terminates on a country-by-country basis on the
later of the expiration of 12 years following the first commercial product sale
or the expiration or invalidity of applicable patents. The licensed patents
expire in Europe in 2011 and in the United States in 2016, subject to
extensions.

Wyeth.In November 2003, we entered into cross license agreements with
Wyeth Pharmaceuticals Division, a division of Wyeth, with respect to patent
rights covering a new class of drugs for the treatment of osteoporosis. Under
the agreements, Wyeth received a license under Tanox patents to develop a small
molecule-based drug, and Tanox received a license under Wyeths patent
applications to develop an antibody-based drug. The research is based on a
Tanox patented proprietary target gene. Tanox may receive milestone and
royalty payments from Wyeth-developed products and may pay Wyeth milestones and
royalties from Tanox-developed products under these agreements. We received an
upfront license payment of $1.0 million from Wyeth.

Patents and Proprietary Rights

We pursue patent protection for our proprietary technology and products
and have either been granted patents, have patent applications pending, or are
licensed under patents and patent applications that relate to our products. We
file patent applications in various countries, including in the United States,
Japan, Canada, Australia and certain countries in Europe and Asia. Our issued
patents extend for varying periods according to the date the patent application
was filed (or the date the patent was granted) and the legal term of patents in
the particular country where patent protection is obtained. These patent
terms are fixed initially but may be extended for various reasons, including
delays in obtaining regulatory approval for a product covered by such patents

We hold at least five U.S. patents that cover and/or relate to the use of
anti-IgE antibodies and other allergy/asthma products. We also hold patents in
Europe, Canada, Japan, Singapore, Hong Kong and Australia covering such
products. We have additional anti-IgE patents pending in the United States and
internationally. Some of our patents are co-owned with Novartis. Our patents
covering anti-IgE products expire between 2009 and 2013, subject to potential
patent term extension.

We have a number of other U.S. and foreign patents covering certain other
proprietary technology and products, with over 60 U.S. patents granted to date.
These include a patent portfolio that we purchased at auction, which covers
various technologies, including Bak, a bcl-2 homologue and gene product, and
secreted apoptosis-regulating proteins. In addition to the patents acquired,
we succeeded to various related license agreements that the assignor had
executed, and we have continued to negotiate and enter into out-licenses of
these technologies.

In addition, other companies, some of which may be our competitors, have
filed applications for or have been issued patents, and may obtain additional
patents and proprietary rights, relating to products or processes used in,
necessary to, competitive with or otherwise related to our patents and
products. These products and processes include, among other items, patents
covering technology relating to the type of humanized monoclonal antibodies
that we anticipate developing. Protein Design Labs, Inc. owns certain patents
and patent applications relating to these humanized antibodies. We acquired
the right to

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take non-exclusive licenses to these patents and patent applications for
up to four of our products, which right must be exercised on or before March
17, 2005. We do not know if we will be in a position to exercise this option
with respect to four antibodies prior to such date, or if licenses from Protein
Design Labs will be available for our other products. Under our Settlement and
Cross Licensing Agreement with Genentech, we may secure non-exclusive licenses
under Genentechs Cabilly patents, relating to antibody expression, to the
extent necessary to make, use or sell our anti-IgE antibody products. We also
have certain rights to acquire a non-exclusive license from Genentech under
certain of its patents for our other products, provided that these products are not
exclusively licensed by Genentech to a third party or would not compete with an
existing product of Genentech or its affiliates or a product that they are
actively researching or developing. We obtained a non-exclusive license under
Genentechs Cabilly patent to commercialize antibodies that bind to the antigen
CD4 in exchange for milestone and royalty payments. We cannot assure you that
we will be successful in securing licenses from Genentech under these patents
for other products and product candidates that we have in research and
development. In addition, other parties also own patents covering chimeric or
deimmunized antibodies or processes applicable to making these antibodies, and
we cannot assure you that the patents we have obtained or licenses we have
secured will afford us significant commercial protection or freedom from suit
by third parties.

The scope, enforceability and validity of third party patents, the extent
to which we must obtain licenses under such patents or under other proprietary
rights and the cost and availability of licenses are unknown, but these factors
may limit our ability to market our products. Moreover, even if a license were
available, the payments that would be required could render our efforts to
market certain of our products uneconomic. If we elect to manufacture or
market these products without either a license or a favorable result in
litigation, damages could be assessed that could be materially adverse to us.
Further, failure to obtain a license could result in an injunction prohibiting
us from manufacturing or selling the affected lines of products.

In addition to patents, we rely on trade secrets and proprietary know-how
to protect our technology and products. We seek protection, in part, through
confidentiality and proprietary information agreements. These agreements may
not provide meaningful protection or adequate remedies for our technology if
unauthorized use or disclosure of this information occurs. Furthermore, our
trade secrets may otherwise become known to or be independently developed by
our competitors.

We require our employees, consultants, advisors, outside scientific
collaborators and sponsored researchers and other advisors to execute
confidentiality agreements on commencing an employment, consulting, or other
contractual relationships with us. These agreements provide that all
confidential information developed or made known to the individual during the
course of the relationship is to be kept confidential and not disclosed to
third parties except in specific circumstances. In the case of employees and
certain other parties, the agreements provide that all employment related
inventions conceived by the individual shall be our exclusive property. We
cannot assure you, however, that these agreements will provide meaningful
protection for our confidential information or trade secrets against or in the
event of unauthorized use or disclosure of such information.

Government Regulation

The manufacture and marketing of our products and our research and
development activities are subject to regulations relating to product safety
and efficacy by numerous governmental authorities in the United States and
other countries. In the United States, drugs are subject to rigorous FDA
regulation. The Federal Food, Drug and Cosmetic Act and other federal and
state statutes and regulations govern, among other things, the testing,
manufacture, safety, effectiveness, labeling, storage, record keeping,
approval, advertising and promotion of our products. The lengthy process of
seeking drug approvals, and the subsequent compliance with applicable statutes
and regulations, require the expenditure of substantial resources. Failure to
comply with applicable regulations can result in refusal by the FDA to approve

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product license applications. The FDA also has the authority to revoke
previously granted product approvals.

Before we may market a pharmaceutical product in the United States, the
FDA requires us to complete a series of preclinical and human clinical tests.
Other countries have similar regulations. Preclinical tests include laboratory
evaluations of product chemistry and animal studies to assess the potential
safety and efficacy of the product and its formulations. The results of these
studies must be submitted to the FDA as part of the investigational new drug
application (IND). Human clinical trials cannot begin until the FDA approves
the IND application. Clinical testing involves a three-phase process. In
Phase 1, a small number of patients or healthy volunteers are tested with the
drug to assess its safety profile (adverse effects), dosage tolerance,
metabolism, distribution, excretion and clinical pharmacology. In Phase 2,
clinical trials are conducted with groups of patients afflicted with a
specified disease in order to provide enough data to evaluate the preliminary
efficacy, optimal dose regimen and expanded evidence of safety. In Phase 3,
the drug is tested in a large number of patients with a target disease to
provide enough data to statistically evaluate the efficacy and safety of the
product. We cannot assure you that we will successfully complete clinical
testing of our products within any specified time period, if at all. The
results of the preclinical and clinical testing of the product are then
submitted to the FDA in the form of a biological license application (BLA) or
new drug application (NDA), for marketing approval. In responding to a BLA or
NDA, the FDA may grant marketing approval, request additional testing or
information (either before or after approval) or deny the application if it
determines that the application does not provide sufficient evidence of safety
and efficacy for approval. We cannot assure you that FDA approval will be
obtained on a timely basis, if at all, for any of our products.

In addition, the FDA requires the registration of each drug and approval
of each manufacturing establishment. Since any approval granted by the FDA is
both site and process specific, any material change in the manufacturing
process, equipment or location necessitates additional FDA review and approval.
For our monoclonal antibody products, we are subject to the procedures for
biological products. Domestic manufacturing establishments are subject to FDA
inspection and must comply with current good manufacturing practices (cGMP) for
pharmaceutical products. To supply products for use in the United States,
foreign manufacturing establishments must comply with cGMP and are subject to
periodic FDA or other regulatory authority inspection under reciprocal
agreements with the FDA.

For marketing outside the United States, we also are subject to foreign
regulatory requirements governing human clinical trials and marketing approval
for pharmaceutical products. The requirements governing the conduct of
clinical trials, product licensing, pricing and reimbursement vary widely from
country to country. Whether or not we obtain FDA approval, we must obtain
approval of a product by the comparable regulatory authorities of foreign
countries before manufacturing or marketing the product in those countries.
The approval process varies from country to country and the time required for
these approvals may differ substantially from that required for FDA approval.
We cannot assure you that clinical trials conducted in one country will be
accepted by other countries or that approval in one country will result in
approval in any other country.

In recent years, there have been numerous proposals to change the
healthcare system in the United States. Some of these proposals have included
measures that would limit or eliminate payments for medical procedures and
treatments or subject pharmaceutical product pricing to government control. In
addition, as a result of marketplace pressures, third-party payors are
increasingly attempting to contain healthcare costs by limiting both coverage
and the level of reimbursement of new drug products. Consequently, significant
uncertainty exists as to the reimbursement status of newly-approved healthcare
products. If we or any of our collaborators succeed in bringing one or more of
our products to market, we cannot assure you that third-party payors will
consider them cost effective or allow reimbursement to the consumer at price
levels sufficient for us to realize an appropriate return on our investment in
product development or to even realize a profit. Significant changes in the
healthcare system in the United States or elsewhere, including changes
resulting from adverse trends in third-party reimbursement programs, could
materially reduce our profitability. Such changes could also significantly
harm our ability to raise

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the capital we would need to continue our operations. Furthermore, if
these proposals affect our collaborators, the proposals may harm our ability to
commercialize the products we develop jointly with them.

In addition to FDA regulations, we are subject to regulation under the
Occupational Safety and Health Act, the Environmental Protection Act, the Toxic
Substances Control Act, the Resource Conservation and Recovery Act and other
present and future federal, state or local regulations.

Competition

The pharmaceutical and biotechnology industries are characterized by
rapidly evolving technology and intense competition. Many companies, including
major pharmaceutical and chemical companies, as well as specialized
biotechnology companies, perform activities similar to Tanoxs. Many of these
companies have substantially greater financial and other resources, larger
intellectual property estates, larger research and development staffs, and
greater capabilities and experience in preclinical testing, human clinical
trials, regulatory affairs, manufacturing and marketing. We chose to enter
into the collaboration agreements with Novartis and Genentech, in part, to
secure the benefit of their experience in these areas, as well as the
contribution of their greater financial resources. In addition, colleges,
universities, governmental agencies and other public and private research
organizations conduct research and may market commercial products on their own
or through joint ventures. These institutions are becoming more active in
seeking patent protection and licensing arrangements to collect royalties for
using technology that they have developed. We also compete with these
institutions in recruiting and retaining highly qualified scientific personnel.

The diseases that we have targeted, including asthma, allergy,
inflammation, other diseases affecting the human immune system and infectious
diseases are intensely competitive areas targeted by both pharmaceutical
companies and other biotechnology companies, including Novartis and Genentech.
All of these companies may have competitive products on the market, may be
testing their products in clinical trials or may be focusing on product
approaches that could prove to be superior to our approaches. For instance, we
are aware that some of these companies, which may be our competitors, have
filed applications for or have been issued patents and may obtain additional
patent and proprietary rights relating to products or processes used in,
necessary to, competitive with or otherwise related to, our products or
processes. These patents include, among other items, patents relating to
humanized monoclonal antibodies.

Our competition will be determined in part by the potential indications
for which our antibodies are developed and ultimately approved by regulatory
authorities. For some of our potential products, an important factor in
competition may be the timing of market introduction of our products or
competitive products. Accordingly, we expect the relative speed with which we
develop our products, complete the necessary approval processes and are able to
generate and market commercial quantities of the products to be important
competitive factors. We expect that competition among products approved for
sale will be based, among other factors, on product efficacy and safety, timing
and scope of regulatory approval, product availability, advantages over
alternative treatment methods, price and cost-effectiveness, development,
distribution and marketing capabilities, third-party reimbursement and patent
position.

We are aware that several companies, including Novartis, have existing
products that will compete with Xolair including corticosteriods,
beta-agonists, antihistamines, leukotriene inhibitors, PDE4 inhibitors and
allergen immunotherapy. In addition, several companies have products in
development that may compete with Xolair. These companies include, but are not
limited to, IDEC (Anti-CD23), CellTech/Schering-Plough (Anti-IL5),
GlaxoSmithKline (Anti-IL5), Protein Design Labs (Anti-IL2) and
Genaera/MedImmune (Anti-IL9).

Our TNX-355 program will face competition from existing HIV therapies and
particularly new

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viral entry inhibitors that target CCR5, CXCR4 and gp120 receptors, such
as Fuzeon (Roche/Trimeris), PRO-542 and PRO-140 (Progenics), SCH-C and SCH-D
(Schering-Plough), UK-427857 (Pfizer/Millenium), TAK-220 (Takeda) and AMD070
(AnorMed).

Our competitive position also depends upon our ability to:



| |  |  | discover or acquire and successfully develop new therapeutic
products that successfully treat human diseases;                               
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | develop proprietary products or processes for which we can obtain
patent protection and secure necessary licenses under third party
patents;
|
| |  |  | secure sufficient capital resources to complete product
development and regulatory processes;                                               
|
| |  |  | build or secure manufacturing capacity and to manufacture efficiently;                                                                      
|
| |  |  | enter into collaboration and licensing agreements on acceptable terms;                                                                      
|
| |  |  | attract and retain qualified personnel;                                                                                                     
|
| |  |  | build or obtain a sales organization; and                                                                                                   
|
| |  |  | achieve profitable commercial production of our products.                                                                                   

Manufacturing

We have a small-scale process development, production and purification
facility in which we have produced products for use in our Phase 1 and Phase 2
clinical trials. With funding from Novartis, we constructed the pilot
manufacturing facility. We will use it to produce clinical trial supplies of
TNX-355 for the upcoming Phase 2 study. We may also use the facility for
larger-scale process development and cGMP production of cell culture derived
products. The facility includes a 1,500L bioreactor system and purification
facility and occupies approximately 14,000 square feet of space.

Our current facility will not be adequate for commercial scale
manufacturing requirements and may not be adequate to produce Phase 3 clinical
trial materials. We are evaluating alternatives for Phase 3 clinical trial
materials and commercial manufacturing capacity, including the possible
construction or acquisition of a plant or entering into a contract
manufacturing agreement. If we decide to establish a full-scale manufacturing
facility, we will require substantial additional funds and must hire one or
more managers experienced in biologics manufacturing, hire and train
significant numbers of employees, and comply with the extensive FDA regulations
applicable to such a facility. If we engage a contract manufacturing
organization (CMO) to produce Phase 3 clinical trial and/or commercial
materials, we will increase our current operating expenses significantly. The
increase in costs includes technology transfer to the CMO, process validation
and qualification, scale-up and cGMP production at the CMO.

Research and Development

Company sponsored research and development expenses were $21.0 million,
$22.7 million and $21.7 million in 2003, 2002 and 2001, respectively. We
expect that research and development expenses will increase as we seek to
identify new product opportunities and expand development of our current and
future product pipeline.

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Marketing and Sales

Under our collaboration agreements, Novartis and Genentech have
responsibility for marketing Xolair. Novartis and Genentech share U.S.
marketing rights, and each company currently has a dedicated sales force of 125
sales representatives marketing to allergists and pulmonologists. Novartis has
marketing rights in Europe, where costs and profits are shared with Genentech.
Novartis has rights to market collaboration products in the rest of the world,
and in China, Hong Kong, Korea, Singapore and Taiwan, where costs and profits
are shared with us.

To effectively serve the worldwide markets, we intend to continue to
collaborate with major pharmaceutical companies or prominent pharmaceutical
sales and distribution organizations that can successfully market our products
on a worldwide basis or within specific geographic territories. As we pursue
strategic collaborations, we intend to reserve marketing rights for our
products, to the extent commercially reasonable. We will focus initially on
markets for which our products have a clear advantage over other therapies or
which we may target using a relatively small sales force. We currently do not
have an internal sales and marketing capability. If we elect to retain
marketing rights, we will have to build a sales and marketing infrastructure.

For financial information about geographic areas, please read Note 13 to
our consolidated financial statements included in this Form 10-K.

Employees

At December 31, 2003, we had 118 full-time employees, all of which are
based in the United States. We do not currently maintain key employee life
insurance on any of our personnel.

Corporate History

We were incorporated in Delaware in 2000 as the successor to a corporation
formed in 1986 under the laws of the State of Texas.

Available Information

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and amendments to those reports are available
free of charge on or through our internet website at http://www.tanox.com. These filings
are also available to the public at the Securities and Exchange Commissions
(SEC) Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The
public may obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. Electronic filings with the SEC are also
available on the SEC internet website at http://www.sec.gov.

Forward-Looking Statements

Some of the information in this Annual Report on Form 10-K contains
forward-looking statements. We typically identify forward-looking statements
by using terms such as may, should, could, expect, plan,
anticipate, believe, estimate, predict, potential or similar words,
although we express some forward-looking statements differently. You should be
aware that actual events could differ materially from those suggested in the
forward-looking statements due to a number of factors, including:

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| |  |  | the ability to develop safe and effective drugs;                                                                                                                     
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | failure to achieve positive results in preclinical and toxicology
studies in animals and clinical trials in humans;                                                  
|
| |  |  | failure to economically and timely manufacture sufficient amounts
of our products for clinical trials and commercialization activities;                              
|
| |  |  | failure to receive, or delay in receiving, marketing approval for our products;                                                                                      
|
| |  |  | failure to successfully commercialize our products, including gaining market acceptance;                                                                             
|
| |  |  | our ability to manage relationships with collaboration partners;                                                                                                     
|
| |  |  | our ability to obtain, maintain and successfully enforce patent
and other proprietary rights protection of our products;                                             
|
| |  |  | variability of royalty, license and other revenues;                                                                                                                  
|
| |  |  | our ability to enter into future collaboration agreements to
support our research and development activities;                                                        
|
| |  |  | drug withdrawal from the market due to rare adverse reactions
caused by the marketed drug;                                                                           
|
| |  |  | our ability to secure licenses from third parties holding patents
that may affect the manufacture or marketing of our products;                                      
|
| |  |  | competition and technological change;                                                                                                                                
|
| |  |  | existing and future regulations affecting our business, including
the content, timing of submissions and decisions made by the FDA and
other regulatory agencies; and
|
| |  |  | our ability to hire and retain experienced managers.                                                                                                                 

Factors that could cause our actual results to differ from those set forth
in the forward-looking statements include those set forth below, as well as
those discussed elsewhere in this Form 10-K.

Factors That May Affect Our Future Results

Regulatory Risks

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Developing Therapeutic Monoclonal Antibodies is Highly Uncertain. Our
Initial Preclinical and Initial Clinical Testing Results May Not Predict Later
Stage Results. If Our Trial Results Are Negative, We May Be Forced to Stop
Developing Products Important to Our Future.

Successful development of therapeutic monoclonal antibodies is highly
uncertain. First, we must discover or otherwise acquire drug candidates. Then
we must demonstrate through preclinical studies and clinical trials that our
products are safe and effective for use in a particular target indication
before we can obtain regulatory approvals to sell our products commercially to
that patient group. These studies and trials tend to be very costly and time
consuming. Furthermore, the results of preclinical studies and initial
clinical trials of our products do not necessarily predict the results from
later-stage clinical trials, which must demonstrate the desired safety and
efficacy traits.

Products that appear promising in early phases of development may fail to
secure regulatory approval for a number of reasons, including:



| |  |  | Our clinical trials fail to achieve their primary endpoint(s) and
the product is either not as effective as required or causes serious
adverse reactions or side effects in patients participating in the
trials; often these reactions may not be detectable in small, early
stage trials and can only be identified when the product is
administered to a larger patient base, as in Phase 3 trials or
following market approval;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The commercial introduction of competitive drugs that have greater
efficacy or safety than our product or otherwise adversely impact the
risk/benefit profile of our product; and                                                                                                                                                                                                                                                  
|
| |  |  | Proprietary rights of third parties, which cover our products and
for which we are not able to secure licenses on reasonable terms.                                                                                                                                                                                                                                                                                                

In addition, the speed with which we are able to enroll patients in
clinical trials is an important factor in determining how quickly we may
complete clinical trials and the cost of running those trials. Many factors
affect patient enrollment, including the size of the patient population, the
proximity of patients to clinical sites, the eligibility criteria for the
study, whether the drug will continue to be made available to the patient
following completion of the trial, and other ongoing trials directed at the
same indication. We may target our clinical trial protocols at indications
that have small patient populations, which may make it difficult for us to
enroll enough patients to complete the trials.

Delays in patient enrollment in the trials will result in increased costs
and program delays, which could slow down our product development and approval
process, and could materially harm our business and results of operations.

If We Do Not Receive and Maintain Regulatory Approvals, We Will Not Be
Able to Market Our Products.

Our collaboration partners have secured approval to market Xolair in the
United States and Australia, and expect to submit an application with the EMEA
in 2004 for approval to manufacture and market Xolair in Europe. We cannot
assure you that the application will be filed or, if filed and accepted, that
Xolair will be timely approved, if at all, for sale in Europe. Failure to
secure EMEA approval would have a significant negative effect on our income
from Xolair sales and on our results of operations.

As a company, Tanox has not prepared or submitted any marketing approval
applications to the FDA or any other regulatory agency for any of its products.
As described above, the process that pharmaceutical products must undergo to
receive this approval is extensive, and includes preclinical testing and
clinical trials to demonstrate safety and efficacy and a review of the
manufacturing process to ensure compliance with cGMP. This process can last
many years, be very costly and still be

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unsuccessful. The FDA can delay, limit or not grant approval for many
reasons, including:



| |  |  | their belief that a product candidate is not safe and effective;                                                       
| | - |  | -----------------------------------------------------------------------------------------------------------------------
|
| |  |  | their interpretation of data from preclinical testing and
clinical trials in different ways than we interpret it;      
|
| |  |  | failure of our manufacturing processes or facilities or those of
our collaboration partners to meet cGMP standards; and
|
| |  |  | change in its approval policies and guidelines or adoption of new
regulations.                                         

We may also experience development delays due to slow patient enrollment
in clinical trials, delays in securing clinical drug supply and unexpected
manufacturing issues or requests from the FDA for additional clinical data.

The process of obtaining approvals to manufacture and market our products
in foreign countries is subject to delay and failure for the same reasons.

Our products other than Xolair require significant additional laboratory
development or clinical trials before they can be commercialized. We have
limited capacity to conduct and manage clinical trials and rely on third
parties, potentially including collaborative partners and contract research
organizations, to assist us these efforts. Our reliance on third parties may
result in delays in completing, or failing to complete, clinical trials if our
collaborators fail to perform under our agreements with them.

Continued approval of a product candidate could also depend on
post-marketing studies. In addition, any marketed product and its manufacturer
continue to be subject to strict regulation after approval. Any unforeseen
problems with an approved product or any violation of regulations could result
in restrictions on the product, including its withdrawal from the market.

Delays in receiving or failing to receive regulatory approvals, or losing
previously received approvals, would delay or prevent product
commercialization, which would adversely affect our business, financial
condition and results of operations.

We Are Subject to the Uncertainty Related to Reimbursement Policies and
Healthcare Reform Measures.

In recent years, there have been numerous proposals to change the
healthcare system in the United States. Some of these proposals have included
measures that would limit or eliminate payments for medical procedures and
treatments or subject pharmaceutical product pricing to government control. In
addition, as a result of marketplace pressures, third-party payors are
increasingly attempting to contain healthcare costs by limiting both coverage
and the level of reimbursement of new drug products. Consequently, significant
uncertainty exists as to the reimbursement status of newly-approved healthcare
products. If we or any of our collaborators succeed in bringing one or more of
our products to market, we cannot assure you that third-party payors will
consider them cost effective or allow reimbursement to the consumer at price
levels sufficient for us to realize an appropriate return on our investment in
product development or to even realize a profit.

Significant changes in the healthcare system in the United States or
elsewhere, including changes resulting from adverse trends in third-party
reimbursement programs, could materially reduce our potential profitability.
Such changes could also significantly harm our ability to raise the capital we
would need to continue our operations. Furthermore, if these proposals affect
our collaborators, the proposals may harm our ability to commercialize the
products we develop jointly with them.

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Risks Relating to our Industry, Business and Strategy

Our Ability to Become a Profitable Fully Integrated Biopharmaceutical
Company Will Depend on the Commercial Success of Xolair and on the Success of
TNX-355, Which is Still in Development, and on Our Success in Securing and
Successfully Developing New Clinical Candidates. If we are Unable to
Commercialize TNX-355 or Experience Significant Delays in Doing So, and if We
are Unable to Secure New Development Candidates, our Business May be Harmed.

We anticipate that, in the near term, our ability to become profitable
will depend on the success of our partners in generating significant levels of
sales of Xolair. In the longer term, an important part of our strategy is to
become a fully integrated biopharmaceutical company. Our ability to do so will
depend on the successful development, approval and commercialization of
TNX-355, our most advanced product candidate, or on our ability to develop or
otherwise license or acquire potential new clinical stage drug candidates.

All of our current product candidates other than TNX-355 are in
preclinical development or in research, and we do not expect to seek regulatory
approval of these candidates for many years, if ever. A significant portion of
the research that we are conducting involves new and unproven technologies.
Research programs to identify new disease targets and product candidates
require substantial technical, financial and human resources whether or not we
ultimately identify any candidates. Our research programs may initially show
promise in identifying potential product candidates, yet fail to yield product
candidates for clinical development.

In addition, TNX-355 has completed Phase 1 trials and is scheduled to
begin a Phase 2 study in the first half of 2004. If we are unable to recruit
patients for the trial or manufacture the necessary clinical drug supplies, we
would have to modify or otherwise delay the planned study. If we initiate the
trial, but do not achieve the clinical endpoints, or if the results of the
trial indicate that further development and commercialization of TNX-355,
assuming marketing approval, would not be economically viable, we may determine
to terminate development. We may be unable to license or acquire suitable
product candidates or products from third parties for a number of reasons. The
licensing and acquisition of pharmaceutical products is highly competitive. A
number of more established companies are also pursuing strategies to license or
acquire products in the fields in which we are interested. These established
companies may have a competitive advantage over us due to their size, cash and
other resources and greater clinical development and commercialization
capabilities. Other factors that may prevent us from licensing or otherwise
acquiring suitable product candidates include the following:



| |  |  | we may be unable to license or acquire the relevant technology on
terms that would allow us to make an appropriate return from the
product;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | companies that perceive us to be their competitors may be unwilling
to assign or license their product rights to us; or                    
|
| |  |  | we may be unable to identify suitable products or product
candidates within our areas of expertise.                                        

If we are unable to develop suitable potential product candidates through
internal research programs or by acquiring drugs or drug candidates from third
parties, our goal of becoming a fully integrated biopharmaceutical company will
not materialize.

Failure to Secure Future Collaboration Partners for Our Other Products and
Failure by Those Partners to Develop, Manufacture, Market or Distribute Those
Products May Delay or Significantly Impair Our Ability to Generate Revenues or
Profit.

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We intend to rely on future collaboration partners to develop,
manufacture, commercialize, market or distribute certain of our other products.
Many of our competitors are similarly seeking to develop or expand their
collaboration and license arrangements with pharmaceutical companies. The
success of these efforts by our competitors could have an adverse impact on our
ability to form future collaboration arrangements. The process of establishing
collaborative relationships is difficult, time consuming and involves
significant uncertainty. We cannot assure you that we will be able to
negotiate acceptable collaboration agreements in the future. To the extent
that we are unable to enter into future collaboration agreements, we would
encounter increased capital requirements to undertake research, development and
marketing at our own expense, and, in some cases, may have to discontinue
development of one or more products. Even if we are able to continue to
develop certain products on our own, we may experience significant delays in
introducing our product candidates or find that the absence of these
collaboration agreements adversely affects our ability to manufacture or sell
our product candidates.

Even if we enter into future collaborative agreements, we cannot assure
you that efforts under these agreements will succeed because:



| |  |  | contracts with our partners may fail to provide significant
protection or may become unenforceable if one of these partners fails
to perform;                                            
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | our partners may not commit enough capital or other resources to
successfully develop, market or distribute our products;                                                                
|
| |  |  | our partners may not continue to develop and commercialize
products resulting from our collaborations; and                                                                               
|
| |  |  | disputes with our partners may arise that could delay or
terminate our product candidates research, development or
commercialization or result in significant litigation or arbitration.

If any of these risks occur, our product development and productivity may
suffer.

We Face Intense Competition and Rapid Technological Change That Could
Result in Products That Are Superior to the Products We Are Developing.

The biotechnology and pharmaceutical industries are subject to rapid and
significant technological change. We have numerous competitors in the United
States and abroad, including, among others, major pharmaceutical and chemical
companies, specialized biotechnology firms, universities and other research
institutions. These competitors may develop technologies and products that are
more effective or less costly than any of our current or future products, and
that could render our technologies and products obsolete or noncompetitive.
Many of these competitors have substantially more resources and product
development, production and marketing capabilities than we do. In addition,
many of our competitors have significantly greater experience than we do in
undertaking preclinical testing and clinical trials of new or improved
pharmaceutical products and obtaining FDA and other regulatory approvals of
products for use in health care. We also will be competing in manufacturing
efficiency and, if we succeed in achieving commercial sales of our products,
marketing capability, areas in which we have limited or no experience.
Furthermore, our competitors may obtain FDA approval for products sooner or be
more successful in manufacturing and marketing their products than are we or
our collaborators.

Products currently exist in the market that will compete directly with the
products that we seek to develop. Any product candidate that we develop and
that obtains regulatory approval must then compete for market acceptance among
physicians, patients, healthcare payors and the medical community, as well as
for market share. Significant factors in determining whether we will be able
to compete successfully

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include:



| |  |  | relative efficacy and safety of our products;                                                        
| | - |  | -----------------------------------------------------------------------------------------------------
|
| |  |  | timing and scope of regulatory approval;                                                             
|
| |  |  | product availability;                                                                                
|
| |  |  | potential advantages over alternative treatment methods;                                             
|
| |  |  | development, marketing, distribution and manufacturing
capabilities and support of our collaborators;
|
| |  |  | reimbursement coverage from insurance companies and others;                                          
|
| |  |  | price and cost-effectiveness of our products;                                                        
|
| |  |  | patent protection for our products; and                                                              
|
| |  |  | availability of licenses under third party technology and patent rights.                             

If our products are not competitive based on these or other factors, our
business, financial condition and results of operations will be materially
harmed.

Failure to Attract and Retain Key Personnel and Principal Members of Our
Scientific and Management Staff Could Materially Harm Our Business, Financial
Condition and Results of Operations.

Our success depends greatly on our ability to attract and retain qualified
scientific and technical personnel, as well as to retain the services of our
existing technical management staff. To pursue our research and development
programs and product development plans, we will be required to hire additional
qualified medical, scientific and technical personnel. There is intense
competition for qualified staff, and we cannot assure you that we will be able
to attract and retain the necessary qualified staff to develop our business.
The failure to attract and retain key scientific and technical personnel and
management staff, or the loss of any of our current management team and our
inability to replace him or her on a timely basis, could materially harm our
business and financial condition.

We Are Exposed to Product Liability Claims, and It is Uncertain That We
Can Obtain Insurance Against These Claims at a Reasonable Rate in the Future.

Our business exposes us to potential product liability risks, which are
inherent in testing, manufacturing, marketing and selling pharmaceutical
products. We may be held liable if any product we develop, or any product that
uses or incorporates any of our technologies, causes injury or is found
otherwise unsuitable during product testing, manufacturing, marketing or sale.
We cannot assure you that we will be able to avoid product liability exposure.

Product liability insurance for the biopharmaceutical industry is
generally expensive. Although we currently maintain product liability
insurance covering our products in amounts we believe to be commercially
reasonable, we cannot assure you that our coverage is adequate or that
continued coverage will be available at acceptable costs. In addition, some of
our license and collaboration agreements require us to obtain product liability
insurance. Future license and collaboration agreements may also include such a
requirement. Our inability to obtain sufficient insurance coverage at an
acceptable cost or otherwise to protect against potential product liability
claims could prevent or inhibit us or our collaborators from commercializing
our products. A successful claim in excess of our insurance coverage

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could materially harm our business, financial condition and results of
operations.

We Deal With Hazardous Materials and Must Comply With Environmental Laws
and Regulations, Which Can Be Expensive and Restrict How We Do Business.

Our research and development work and manufacturing processes involve the
controlled use of hazardous materials, including chemical, radioactive and
biological materials. Our operations also produce hazardous waste products.
We are subject to federal, state and local laws and regulations governing how
we use, manufacture, store, handle and dispose of these materials. Although we
believe that we comply in all material respects with applicable environmental
laws and regulations, we cannot assure you that we will not incur significant
costs to comply with environmental laws and regulations in the future. In
addition, current or future environmental laws and regulations may impair our
research, development or production efforts.

We Could be Liable for Damages, Penalties or Other Forms of Censure If We
Are Involved in a Hazardous Waste Spill or Other Accident.

Despite precautionary procedures that we implement for handling and
disposing of hazardous materials, we cannot eliminate the risk of accidental
contamination or discharge or any resultant injury from these materials. If a
hazardous waste spill or other accident occurs, and we are held liable for
damages, the liability could exceed our financial resources.

Risks Associated with Manufacturing and Marketing

Failure to Receive Market Acceptance for and Successfully Commercialize
Xolair Would Have a Significant Adverse Effect on Us.

Even though the FDA approved Xolair and initial insurance and
Medicare/Medicaid coverage is encouraging, we cannot be certain that physicians
and patients will widely accept Xolair as a treatment for its approved
indication in the United States or in any foreign markets. A number of factors
may affect the rate and level of Xolairs market acceptance, including:



| |  |  | regulatory developments related to manufacturing or using Xolair;                                                                                                         
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Xolairs price relative to other products or competing treatments;                                                                                                        
|
| |  |  | the effectiveness of Novartis and Genentechs sales and marketing efforts;                                                                                               
|
| |  |  | the perception by physicians and other members of the healthcare
community of Xolairs safety, efficacy and benefits compared to those
of competing products or therapies;
|
| |  |  | the willingness of physicians to adopt a new asthma treatment regimen;                                                                                                    
|
| |  |  | the availability of third-party reimbursement; and                                                                                                                        
|
| |  |  | unfavorable publicity concerning Xolair or comparable products or therapies.                                                                                              

We Have Limited Experience and Capability in Manufacturing and May
Encounter Manufacturing Problems or Delays That Could Result in Lost Revenue or
Delaying Clinical Trials.

To develop products, we require sufficient quantity and quality of
manufactured product for clinical trials. Regulatory or technical
manufacturing issues could delay clinical development of products. Any failure
to produce these clinical requirements, either as a result of our limited

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manufacturing capacity or otherwise, can delay the commencement of, or
ability to continue our ongoing, clinical trials.

To commercialize our products successfully, we and our collaboration
partners must manufacture our products in commercial quantities in compliance
with regulatory requirements and at an acceptable cost. If the manufacturing
facilities used to produce our products cannot pass a pre-approval or periodic
plant inspection, the FDA may not approve our products or it may delay or bar
their sale. In order to obtain regulatory approvals and to create capacity to
produce our products in sufficient quantities for commercial sale at an
acceptable cost, we will have to develop or acquire additional technology for
commercial scale manufacturing and build or otherwise obtain access to adequate
facilities, which will require substantial additional funds. We will also be
required to demonstrate to the FDA and corresponding foreign authorities our
ability to manufacture our products using controlled, reproducible processes.
We cannot assure you that we, operating alone or with the assistance of others,
can develop the necessary manufacturing technology or that we will be able to
fund or build an adequate commercial manufacturing facility necessary to obtain
regulatory approvals and to produce adequate commercial supplies of our
potential products on a timely basis.

We Lack Sales and Marketing Experience, Which Makes Us Depend on Third
Parties for Their Expertise in this Area.

Under our current collaboration agreement, Novartis and Genentech have
exclusive marketing rights to Xolair and other collaboration anti-IgE products,
and revenues we receive from Xolair will depend primarily on the efforts of our
collaboration partners. However, commercialization rights may revert back to
us if our collaborators terminate our relationship, and we currently have no
sales, marketing or distribution capabilities. Furthermore, we intend to
retain marketing rights in the United States and selected Asian countries for
other potential products that we can develop and sell effectively with a small,
targeted sales force. If we elect to market products directly, we would
require significant additional expenditures and management resources to develop
an internal marketing and sales force. We cannot assure you that we would be
able to establish a successful sales force should we choose to do so.

Risks Related to Financial Results and Need for Financing

We Have a History of Net Losses; We Expect to Continue to Incur Net Losses
and We May Never Achieve or Maintain Profitability.

We have incurred net losses since our inception. As of December 31, 2003,
we had an accumulated deficit of approximately $83.5 million, including a net
loss of approximately $4.6 million for the year ended December 31, 2003. Our
losses have primarily been the result of costs incurred in our research and
development programs and from our general and administrative costs.

We have funded our operations principally from licensing fees and
milestone payments under our current or former collaborations, as well as with
proceeds from private placements and an initial public offering of our common
stock. We expect to continue to incur substantial operating losses until such
time, if ever, that we are able to generate sufficient revenue from milestone
payments, royalties and profit-sharing on Xolair sales and, potentially,
profits from an additional product or products to cover our expenses.

Our ability to achieve and maintain long term profitability depends to a
significant extent on the continued successful commercialization of Xolair, and
also on our successfully completing preclinical and clinical trials, obtaining
required regulatory approvals and successfully developing, manufacturing and
marketing our other current and future product candidates. We cannot assure
you that we will be able to achieve any of the foregoing or that we will be
profitable even if we successfully commercialize our products.

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Failure by Novartis or Genentech to Develop, Manufacture, Market or
Distribute Xolair May Delay or Significantly Impair Our Ability to Generate
Revenues.

Under the terms of our collaboration agreements, Novartis and Genentech
are generally responsible for conducting clinical trials, obtaining regulatory
approval for, manufacturing, marketing and distributing Xolair. Our ability to
profit from the products covered by our collaboration agreements with Genentech
and Novartis depends in large part on their performance. We cannot control the
amount and timing of resources Novartis and Genentech will devote to any of our
products. If Novartis or Genentech experiences manufacturing or distribution
difficulties, does not actively market Xolair or other selected anti-IgE
products or does not otherwise perform under our collaboration agreements, our
potential for revenue from those products will be dramatically reduced.
Novartis and Genentech may terminate our collaboration agreements, and, in that
event, we would experience increased capital requirements to undertake
development and marketing at our expense. We cannot assure you that we would
be able to manufacture, market and distribute Xolair or our other anti-IgE
products on our own.

We May Need Additional Financing, But Our Access to Capital Funding is
Uncertain, and Issuance of Additional Common Stock Could Dilute Existing
Stockholders.

Our current and anticipated development projects require substantial
additional capital. While we expect that our cash on hand, together with our
revenue from Xolair, will sufficiently fund our operations for the next four
years, our future capital needs will depend on many factors, the commercial
success of Xolair, receiving milestone payments from our collaboration
partners, including making progress in our research and development activities
and entering into additional collaboration agreements. Our capital
requirements may also depend on the progress and level of unreimbursed costs
associated with preclinical studies and clinical trials, the costs associated
with acquisitions of new product candidates by licensing or otherwise, the
costs of preparing, filing, prosecuting, maintaining and enforcing patent
claims and other intellectual property rights, competing technological and
market developments, changes in or terminations of existing collaboration and
licensing arrangements and the cost of manufacturing scale-up and development
of marketing activities, if undertaken by us. We do not have committed
external sources of funding and we cannot assure you that we will be able to
obtain additional funds on acceptable terms, if at all. If adequate funds are
not available, we may be required to:



| |  |  | delay, reduce the scope of or eliminate one or more of our
development programs;                                                                                                                                                       
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | obtain funds through arrangements with collaboration partners or
others that may require us to relinquish rights to technologies,
product candidates or products that we would otherwise seek to develop
or commercialize ourselves; or
|
| |  |  | license rights to technologies, product candidates or products on
terms that are less favorable to us than might otherwise be available.                                                                                               

If we raise additional funds by issuing additional stock, further dilution
to our stockholders may result, and new investors could have rights superior to
existing stockholders. If funding is insufficient at any time in the future,
we may be unable to develop or commercialize our products, take advantage of
business opportunities or respond to competitive pressures.

The Market Price of Our Common Stock has been Volatile.

Like other stocks of biopharmaceutical companies, the market price for our
common stock has been and may continue to be volatile. During the last two
years, our stock price ranged from $8.03 to $22.74. Factors that contributed
to the volatility of our stock during this period included:



| |  |  | FDA approval of Xolair;
| | - |  | -----------------------

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| |  |  | Reported sales volume of Xolair;                                                    
| | - |  | ------------------------------------------------------------------------------------
|
| |  |  | Results of clinical trials; and                                                     
|
| |  |  | General market conditions, including particularly the biotechnology company segment.

Risks Relating to Intellectual Property

The Patentability, Validity, Enforceability and Commercial Value of Our
Patents Are Highly Uncertain. If Our Intellectual Property Positions are
Challenged, Invalidated or Circumvented and We Fail to Prevail in Resulting
Intellectual Property Litigation, Our Business Could be Adversely Affected.

Our success depends in part on obtaining, maintaining and enforcing
patents and maintaining trade secrets. While we file and prosecute patent
applications to protect our inventions, our pending patent applications may not
result in the issuance of valid patents and our issued patents may not provide
competitive advantages. Also, our patents may not prevent others from
developing competitive products using related technology. We cannot assure you
that pending patent applications developed by or licensed to us will result in
patents being issued or that, if issued, the patents will give us an advantage
over competitors with similar technology.

We own or have licenses to certain issued patents. The patents we own
that are most material to our business are five U.S. patents and six foreign
patents relating to anti-IgE antibodies. However, the patent position of
biotechnology and pharmaceutical firms is highly uncertain and involves many
complex legal and technical issues. There is no clear policy involving the
breadth of claims allowed or the degree of protection afforded under such
patents. Issued patents can be challenged in litigation in the courts and in
proceedings in the United States Patent and Trademark Office and in courts and
patent offices in foreign countries. Issuance of a patent is not conclusive as
to its validity, enforceability or the scope of its claim. We cannot assure
you that our patents will not be successfully challenged as to enforceability,
invalidated or limited in the scope of their coverage. Moreover, litigation to
uphold the validity of patents and to prevent infringement can be very costly
and can result in diverting technical and management personnels time and
attention, which may materially harm our business, financial condition and
results of operations. If the outcome of litigation is adverse to us, third
parties may be able to use our patented technology without paying us.
Moreover, we cannot assure you that our patents will not be infringed or
successfully avoided through design innovation. Any of these events may
materially and adversely affect our business.

In addition to the intellectual property rights described above, we also
rely on unpatented technology, trade secrets and confidential information. We
cannot assure you that others will not independently develop substantially
equivalent information and techniques or otherwise gain access to our
technology or disclose such technology, or that we can effectively protect our
rights in unpatented technology, trade secrets and confidential information.
We require each of our employees, consultants and advisors to execute a
confidentiality agreement at the commencement of an employment or consulting
relationship with us. We cannot assure you, however, that these agreements
will provide effective protection if an unauthorized use or disclosure of this
confidential information occurs.

If We Fail To Obtain Any Required Patent License From Third Parties, Our
Product Development Efforts Could Be Limited.

Our success also depends on our ability to license the rights to patents
and patent applications owned by others and to operate without infringing the
proprietary rights of third parties. There may be patent rights belonging to
others that require us to alter our products, pay licensing fees or cease
certain activities. If our products conflict with patent rights of others, the
owners of those patent rights could bring legal actions against us claiming
damages and seeking to stop us from manufacturing and marketing the affected
products. If these legal actions are successful, in addition to any potential
liability for damages, we could be required to obtain a license in order to
continue to manufacture or market the

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affected products. We cannot assure you that we would prevail in any such
action or that any license required under any such patent would be made
available on acceptable terms or at all. Any of these events may materially
harm our business, financial condition and results of operations.

Researching, developing and commercializing a biopharmaceutical product
often involves alternative development and optimization routes that are
presented at various stages in the development process. We cannot predict the
preferred routes at the outset of a research and development program, because
they will depend on subsequent discoveries and test results. There are
numerous third-party patents in our field, and it is possible that, to pursue
the preferred development route of one or more of our products, we will need to
obtain a license to a patent, which would decrease the ultimate profitability
of the applicable product. If we cannot negotiate a license, we might have to
pursue a less desirable development route or terminate the program altogether.

We are aware that other groups have claimed discoveries similar to those
covered by our patent applications. In addition, other companies, some of
which may be our competitors, have filed applications for or have been issued
patents and may obtain additional patents and proprietary rights relating to
products or processes used in, necessary to, competitive with or otherwise
related to our patents and products. These products and processes include,
among other items, patents covering technology relating to humanized monoclonal
antibodies that we anticipate developing. Protein Design Labs, Inc. owns
certain patents and patent applications relating to such humanized antibodies.
We have acquired the right to take a non-exclusive licenses to these patents
for up to four of our products. Additionally, Genentech owns patents relating
to antibody chain co-expression. We have certain rights to acquire a
non-exclusive license from Genentech for these patents for products that are
not exclusively licensed by Genentech to a third party and that would not
compete with an existing product of Genentech or its affiliates or a product
that they are actively researching or developing. We cannot assure you that we
will be able to obtain licenses from Protein Design Labs for our other antibody
products, of that we will be successful in securing licenses from Genentech for
products and product candidates that we have in research or development.

Certain of our license agreements require periodic cash payments and
achievement milestones to maintain our rights under such agreements. We cannot
assure you that we will be able to achieve the required milestones and maintain
our rights under these license agreements. If any of our license agreements
terminate because of our failure to achieve any required milestone, we may be
unable to commercialize any related product under the terms of the agreement.

Executive Officers of Tanox

Our executive officers and their ages and positions with Tanox are:

|                          |  |     |    |          |  |                                              
|------------------------- |  | --- | -- | -------- |  | ---------------------------------------------
|Name                      |  | Age |    | Position
|                          |  |     |    |         
|Nancy T. Chang, Ph.D.     |  |     | 54 |          |  | President and Chief Executive Officer        
|                          |  |     |    |          |  |                                              
|Jeffrey W. Organ          |  |     | 50 |          |  | Chief Operating Officer                      
|                          |  |     |    |          |  |                                              
|Matthew Moyle, Ph.D.      |  |     | 43 |          |  | Vice President of Research                   
|                          |  |     |    |          |  |                                              
|Gregory P. Guidroz, C.P.A |  |     | 51 |          |  | Vice President of Finance                    
|                          |  |     |    |          |  |                                              
|Katie-Pat Bowman          |  |     | 49 |          |  | Vice President, General Counsel and Secretary

Nancy T. Chang, Ph.D.,is one of our co-founders and has served as our
President since our organization in March 1986. Dr. Chang has served as our
Chief Executive Officer since June 1990 and was Chairman of the Board of
Directors from organization through October 2003. From 1986 to 1992,

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Dr. Chang served as an Associate Professor at Baylor College of Medicine
in the Division of Molecular Virology. Between 1981 and 1986, Dr. Chang was
employed by Centocor, Inc., serving as the Director of Research, Molecular
Biology Group, from 1984 to 1986. From 1980 to 1981, she was employed by Roche
Institute of Molecular Biology. Dr. Chang received her Ph.D. in Biological
Chemistry from Harvard University.

Jeffrey W. Organhas served as our Chief Operating Officer since May 2002.
Prior to joining Tanox, from March 2000 to April 2002, Mr. Organ served as an
independent consultant to product and service companies in the healthcare and
pharmaceutical industries. From 1997 to 2000, Mr. Organ served as Vice
President of Marketing at Bridge Medical, a start-up company developing drug
delivery and patient safety systems. From February 1996 to January 1997, he
held the position of Senior Vice President of Marketing with IMED Corporation,
a leading provider of intravenous drug delivery systems. Prior to that, Mr.
Organ was President of Major Pharmaceuticals, a distributor of pharmaceuticals
to retail and institutional pharmacies, worked at Fujisawa Pharmaceuticals as
Vice President and General Manager for Multisource products, and worked at
American Hospital Supply in a variety of sales and marketing positions. He
received a BA from the University of Missouri and an MBA from Pepperdine
University.

Matthew Moyle, Ph.D.,joined us as Vice President of Research in January
2001. Prior to that, he held various positions with Amgen, Inc., a
biotechnology company, since October 1995, including most recently Department
Head of Expression Profiling and Pharmacogenomics. From July 1991 to September
1995 he held senior research positions with Corvas, Inc. where he was involved
in the discovery and development of two biological agents that are currently in
clinical testing. While at Amgen and Corvas, Dr. Moyle was actively involved
in recruiting scientists and establishing multi-disciplinary project teams. He
also participated in licensing transactions. Dr. Moyle received both his Ph.D.
and B.Sc. degrees in Biochemistry from the University of Toronto.

Gregory P. Guidroz, C.P.A., has served as our Vice President of Finance
since July 2002. Prior to joining Tanox, Mr. Guidroz served as Chief Financial
Officer for Integrated Diagnostic Centers, Inc., a diagnostic imaging center
company, from July 1999 until July 2002. He was Co-Founder and Chief Financial
Officer for NPPA of America, Inc., a multi-state provider of nurse practitioner
and physician assistant services, from April 1998 until March 1999 when it was
acquired. From June 1995 until March 1998, he was a Principal with Healthcare
Solutions, Inc., a healthcare management consulting firm. From November 1975
until May 1995, Mr. Guidroz held Chief Financial Officer or Controller
positions in various healthcare and software corporations. He began his career
on the audit staff of Arthur Andersen after receiving a BBA from Lamar
University. Mr. Guidroz has been a Partner with Tatum CFO Partners, LLP since
July 1999.

Katie-Pat Bowmanhas served as our Vice President, General Counsel and
Secretary since July 2000. Prior to that she was Senior Corporate Counsel and
Assistant Secretary for Lyondell Chemical Company from September 1999 until
July 2000. She was Vice President and General Counsel for Daniel Industries
Inc., a pipeline equipment manufacturer, from September 1997 until September
1999, when it was acquired by Emerson Electric Company. Prior to that, she
practiced law with Houston-based law firms Haynes & Boone LLP and Fulbright &
Jaworski, L.L.P. since 1987. Ms. Bowman, a CPA, practiced public accounting
and worked in industry as an accountant from 1977 through 1987. She received
both a Juris Doctorate and BBA from the University of Houston.

Scientific Advisors

An important component of our scientific strategy is to establish
collaborative relationships with leading researchers in our fields of interest.
Certain of our scientific advisors attend periodic meetings and provide us
with specific expertise in both research and clinical development. In
addition, we have collaborative research relationships with certain individual
advisors. We do not employ our scientific advisors, and they may have
commitments to or consulting or advisory agreements with other entities. In

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general, our scientific advisors may hold stock options, own our stock
and/or receive financial remuneration for their services.

Our scientific advisors are:

|                                    |  |                                                                                                                                       
|----------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------
|Name                                |  | Title and Affiliation                                                                                                                 
|                                    |  |                                                                                                                                       
|John Atkinson, M.D.                 |  | Professor, Department of Medicine & Medical
Microbiology, Washington University School of
Medicine                                    
|                                    |  |                                                                                                                                       
|K. Frank Austen, M.D.*              |  | Director, Inflammation and Allergic Diseases, Brigham
and Womens Hospital                                                            
|                                    |  |                                                                                                                                       
|Yong-Jun Liu, M.D., Ph.D.           |  | Chairman of Department of
Immunology and Director of Center
for Cancer Immunology, The
University of Texas M.D. Anderson
Cancer Center
|                                    |  |                                                                                                                                       
|Donald MacGlashan, Jr., M.D., Ph.D. |  | Associate Professor of Medicine,
Johns Hopkins Asthma and Allergy
Center                                                              
|                                    |  |                                                                                                                                       
|Robert T. Schooley, M.D.            |  | Chief of Division of Infectious
Diseases, University of Colorado
Health Science Center                                                
|                                    |  |                                                                                                                                       
|Ethan M. Shevach, M.D.              |  | Chief, Cellular Immunology Section,
National Institute of Allergy and
Infectious Disease                                              



---

|* |  | Chairman
|- |  | --------




ITEM 2. Properties

Our research and manufacturing operations are conducted in a 43,560 square
foot building, which we own in Houston, Texas. In 2002, we acquired a 68,000
square foot office and warehouse building adjacent to our existing facility,
which we are renovating into a research lab and administrative office building.
Our corporate administrative offices currently occupy approximately 13,100
square feet of space in Houston, Texas under a lease that expires on March 31,
2004, at which time we will relocate our corporate administration, clinical
development and research groups to the renovated lab and office facility. We
also own approximately 28 acres of land near our existing facilities.




ITEM 3. Legal Proceedings

Dispute with Genentech and Novartis Over Independent Development Rights
and Other Matters.Prior to October 2002, we had been pursuing clinical
development of TNX-901 to determine its potential in treating peanut-induced
anaphylaxis independently of Novartis and Genentech. Novartis and Genentech
had disputed our right to pursue development of TNX-901 independently, but we
believed our agreements with Novartis and Genentech permitted this activity.

In an effort to resolve this dispute, we initiated an arbitration with
Novartis in March 1999 pursuant to our Development and Licensing Agreement (D&L
Agreement) with Novartis. In that arbitration, we sought, among other things,
to confirm our rights to independently develop certain anti-IgE products,
including TNX-901, and to use know-how we received from Novartis in our
development activities. Novartis initially claimed that the dispute was not
subject to arbitration and that our claimed rights to independently develop
TNX-901 did not exist. Novartis also claimed damages arising from our actions.

In response to this arbitration, Novartis and Genentech jointly filed suit
against us in April 1999 in the U.S. District Court for the Northern District
of California. In the lawsuit, Novartis and Genentech initially sought, among
other things, declarations that we could not develop TNX-901 independently and

26



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that we could not use confidential and proprietary information obtained
from Novartis or Genentech for independent product development.

In July 1999, we initiated an arbitration proceeding against Genentech,
initially seeking, among other things, confirmation that Genentech had
acknowledged our independent development rights and agreed to allow us to use
and disclose their confidential and proprietary information in connection
therewith.

In October 2001, the Court granted a summary judgment in our favor,
finding that, pursuant to the D&L Agreement with Novartis, we had independent
development rights, and that nothing in the Outline of Terms among Tanox,
Genentech and Novartis superseded those rights.

Thereafter, Novartis and Genentech continued to dispute our right to
independently develop TNX-901 and, in December 2001, the Court stayed the
litigation and directed the parties to return to the two arbitrations to
resolve remaining issues with respect to TNX-901 and the other issues being
disputed by the parties. The arbitration panel in the Tanox-Novartis
arbitration heard issues relating to whether or not Tanox had the right under
the D&L Agreement to independently develop TNX-901 and, in October 2002, ruled
that Tanox does not. While this ruling seemed to conflict with the earlier
summary judgment, we suspended further plans to develop TNX-901. The panel
further ruled that Novartis is obligated to share its Xolair knowledge with
Tanox. The second phase of the arbitration, which would focus on breach of
contract claims by the two parties, was postponed by mutual agreement so the
parties could focus on settlement discussions.

The hearing and briefing in the Tanox-Genentech arbitration concluded in
April 2003. We claimed breach of contract, conversion, tortious interference,
unjust enrichment and unfair competition by Genentech. Genentech
counterclaimed for breach of contract, theft of trade secrets,
misappropriation, breach of confidence, interference with contract and
interference with economic expectancies by Tanox. By mutual agreement, the
parties deferred delivery of the arbitration award so they could focus on
settlement discussions.

On February 25, 2004, we settled all litigation and arbitrations with
Novartis and Genentech and finalized the detailed terms of our three-party
collaboration, begun in 1996, to develop and commercialize certain anti-IgE
antibodies, including Xolair and TNX-901. Under the terms of the settlement:
Genentech and Novartis will each reimburse us $3.3 million for a portion of our
TNX-901 development costs; we will relinquish any rights to manufacture Xolair
and, in exchange, will receive quarterly payments tied to the quantity of
Xolair produced; and we will benefit from an accelerated forgiveness of a loan
to finance the construction of our biologics manufacturing plant in the
mid-1990s.

Dispute with Former Attorneys.We have been seeking vacature of an
arbitration award rendered in a fee dispute with the law firms that represented
us in connection with a lawsuit involving Genentech relating to, among other
things, the intellectual property rights of the parties surrounding the
development of anti-IgE technology. We settled the lawsuit contemporaneously
with the formation of our collaboration with Genentech.

We initiated the arbitration proceeding in August 1996, after we and our
attorneys, Akin, Gump, Strauss, Hauer and Feld, L.L.P., The Robinson Law Firm
and Williams, Birnberg & Anderson, could not reach agreement on the fee owed
pursuant to the terms of our written fee agreement. The arbitration panel
issued an award entitling the attorneys to receive (i) approximately $3.5
million, including interest, (ii) payments ranging from 33-1/3% to 40% of the
future milestone payments, in excess of the first $1 million, we would receive
from Genentech under the collaboration following product approval and (iii) 10%
of the royalties that we receive on all sales of certain anti-IgE products,
including Xolair.

We sought a court order vacating the arbitration award, but a judgment was
entered confirming the award, and that judgment was affirmed by the Court of
Appeals, 14th District of Texas. On October

27



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31, 2003, the Texas Supreme Court denied our petition for review. During
the appeals process, we were required to place amounts in escrow to secure
payment of the award, and had escrowed $9.7 million with the Harris County
District Court as of December 31, 2003. These funds, recorded as restricted
cash at December 31, 2003, were released to the former attorneys during
February 2004.




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

No matters were submitted to a vote of security holders of the Company,
through solicitation of proxies or otherwise, during the last quarter of 2003.

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PART II




ITEM 5. Market for the Companys Common Equity and Related Stockholder Matters

Market Price and Dividends

Our common stock trades on The NASDAQ Stock Market under the symbol TNOX.
The table below provides the high and low sales prices of our common stock for
the periods indicated, as reported by the NASDAQ Stock Market.

|                              |  |      |       |     |  |   |       | 
|----------------------------- |  | ---- | ----- | --- |  | - | ----- | 
|                              |  | High |       | Low
|                              |  |      |       |    
|Year Ended December 31, 2002: |  |      |       |     |  |   |       | 
|First quarter                 |  | $    | 18.46 |     |  | $ | 12.95 | 
|Second quarter                |  |      | 14.10 |     |  |   | 9.25  | 
|Third quarter                 |  |      | 13.48 |     |  |   | 8.93  | 
|Fourth quarter                |  |      | 11.91 |     |  |   | 9.03  | 
|Year Ended December 31, 2003: |  |      |       |     |  |   |       | 
|First quarter                 |  | $    | 12.95 |     |  | $ | 8.03  | 
|Second quarter                |  |      | 19.75 |     |  |   | 11.92 | 
|Third quarter                 |  |      | 22.74 |     |  |   | 15.61 | 
|Fourth quarter                |  |      | 20.00 |     |  |   | 13.59 | 

On March 10, 2004, the last reported sale price of our common stock on the
NASDAQ Stock Market was $14.71. As of March 10, 2004, there were 43,941,226
shares of common stock outstanding and 131 shareholders of record of our common
stock, one of which is Cede & Co., a nominee for Depository Trust Company (or
DTC). All of the shares of Common Stock held by brokerage firms, banks and
other financial institutions as nominees for beneficial owners are deposited
into participant accounts at DTC, and therefore considered to be held of record
by Cede & Co. as one stockholder.

We have never declared or paid any cash dividends on our common stock and
do not anticipate paying such cash dividends in the foreseeable future. We
currently anticipate that we will retain all of our future earnings for use in
our research and product development activities and for general corporate
purposes. Any determination to pay dividends in the future will be at the
discretion of our Board of Directors and will depend upon our results of
operations, financial condition and other factors as the Board of Directors, in
its discretion, deems relevant.

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ITEM 6. Selected Financial Data

The information below was derived from the audited consolidated financial
statements included in this report and in reports we have previously filed with
the SEC. This information should be read together with those consolidated
financial statements and the notes to the consolidated financial statements.
These historical results are not necessarily indicative of the results to be
expected in the future.

|                                                            |  |                                       |        |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|----------------------------------------------------------- |  | ------------------------------------- | ------ | ---- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                            |  | Year Ended December 31,              
|                                                            |  |                                      
|                                                            |  | 2003                                  |        | 2002 |  | 2001 |         | 2000 |  | 1999
|                                                            |  |                                       |        |      |  |      |         |      |  |     
|                                                            |  | (In thousands, except per share data)
|STATEMENT OF OPERATIONS DATA:                               |  |                                       |        |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Revenues [1]                                                |  | $                                     | 18,487 |      |  | $    | 560     |      |  | $    | 419     |   |  | $ | 12,748  |   |  | $ | 1,405   |  
|                                                            |  |                                       |        |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Research and development                                    |  |                                       | 21,037 |      |  |      | 22,651  |      |  |      | 21,683  |   |  |   | 18,325  |   |  |   | 17,163  |  
|General and administrative                                  |  |                                       | 7,337  |      |  |      | 10,677  |      |  |      | 8,349   |   |  |   | 7,683   |   |  |   | 8,582   |  
|Restructuring charge                                        |  |                                       |       |      |  |      | (268    | )    |  |      | 3,860   |   |  |   |        |   |  |   |        |  
|                                                            |  |                                       |        |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Total operating costs and expenses                          |  |                                       | 28,374 |      |  |      | 33,060  |      |  |      | 33,892  |   |  |   | 26,008  |   |  |   | 25,745  |  
|                                                            |  |                                       |        |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Loss from operations                                        |  |                                       | (9,887 | )    |  |      | (32,500 | )    |  |      | (33,473 | ) |  |   | (13,260 | ) |  |   | (24,340 | )
|Other income, net                                           |  |                                       | 5,021  |      |  |      | 6,478   |      |  |      | 12,096  |   |  |   | 13,128  |   |  |   | 1,028   |  
|                                                            |  |                                       |        |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Loss before income taxes                                    |  |                                       | (4,866 | )    |  |      | (26,022 | )    |  |      | (21,377 | ) |  |   | (132    | ) |  |   | (23,312 | )
|Benefit (provision) of income taxes                         |  |                                       | 228    |      |  |      |        |      |  |      |        |   |  |   | (915    | ) |  |   | (34     | )
|                                                            |  |                                       |        |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Net loss                                                    |  | $                                     | (4,638 | )    |  | $    | (26,022 | )    |  | $    | (21,377 | ) |  | $ | (1,047  | ) |  | $ | (23,346 | )
|                                                            |  |                                       |        |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Net loss per share  basic and diluted                      |  | $                                     | (0.11  | )    |  | $    | (0.59   | )    |  | $    | (0.49   | ) |  | $ | (0.03   | ) |  | $ | (0.75   | )
|                                                            |  |                                       |        |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Shares used in computing loss per share 
basic and diluted |  |                                       | 43,979 |      |  |      | 43,911  |      |  |      | 44,010  |   |  |   | 40,258  |   |  |   | 31,113  |  
|                                                            |  |                                       |        |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  

|                                           |  |                |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|------------------------------------------ |  | -------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                           |  | December 31,  
|                                           |  |               
|                                           |  | 2003           |         | 2002 |  | 2001 |         | 2000 |  | 1999
|                                           |  |                |         |      |  |      |         |      |  |     
|                                           |  | (In thousands)
|BALANCE SHEET DATA:                        |  |                |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Cash, cash equivalents and investments [2] |  | $              | 227,434 |      |  | $    | 227,990 |      |  | $    | 261,102 |   |  | $ | 275,921 |   |  | $ | 47,254  |  
|Working capital                            |  |                | 154,566 |      |  |      | 127,592 |      |  |      | 198,092 |   |  |   | 175,309 |   |  |   | 42,718  |  
|Total assets                               |  |                | 251,856 |      |  |      | 251,211 |      |  |      | 277,534 |   |  |   | 290,978 |   |  |   | 55,328  |  
|Notes payable                              |  |                | 15,000  |      |  |      | 15,000  |      |  |      | 10,000  |   |  |   | 10,000  |   |  |   | 10,000  |  
|Accumulated deficit                        |  |                | (83,545 | )    |  |      | (78,907 | )    |  |      | (52,885 | ) |  |   | (31,508 | ) |  |   | (30,461 | )
|Total stockholders equity                 |  |                | 222,657 |      |  |      | 225,516 |      |  |      | 256,441 |   |  |   | 272,774 |   |  |   | 40,007  |  

[1] Revenues for 2003 and 2000 consist primarily of milestone payments from
our collaboration partners.

[2] Includes restricted cash and investments of $15,967 and $14,441 in 2003
and 2002, respectively.

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ITEM 7. Managements Discussion and Analysis of Financial Condition and Results of Operations

Overview




Tanox discovers and develops therapeutic monoclonal antibodies to address
significant unmet medical needs in the areas of asthma, allergy, inflammation,
other diseases affecting the human immune system and infectious diseases. Our
products are genetically engineered antibodies that target a specific molecule
or antigen.

Our first product, Xolair, was developed in collaboration with Genentech
and Novartis. Xolair received U.S. FDA marketing approval in June 20, 2003,
and was launched in the U.S. in July 2003. We received $20.0 million of
milestone payments under our collaboration agreements with Novartis and
Genentech upon the FDA approval of Xolair, $5.3 million of which is due to our
former attorneys under the terms of an adverse arbitration award (see Note 12.
Commitments and Contingencies).

Xolair generated approximately $25.0 million in U.S. sales in 2003 and is
being distributed through five specialty pharmacy distributors. Xolair is
currently labeled for treatment of adults and adolescents (12 years of age and
above) with moderate-to-severe persistent asthma who have a positive skin test
or in vitro reactivity to a perennial aeroallergen and whose symptoms are
inadequately controlled with inhaled corticosteroids. Xolair has been shown to
decrease the incidence of asthma exacerbations in these patients. Safety and
efficacy have not been established in other allergic conditions. Clinical
trials to test the safety and efficacy of Xolair to treat pediatric asthma
patients and peanut allergy patients are expected to begin in 2004.

In 2003, we recorded royalty income of $1.9 million from sales of Xolair.
Under our collaboration agreements with Genentech and Novartis, we receive
royalties on the net sales of Xolair and will share in Novartis net profits
from sales of Xolair in the United States. Over the next several years, we
expect our principal revenues will be royalties and profit-sharing payments
relating to sales of Xolair.

During 2003, we completed a single-dose 30-patient Phase 1a trial and a
multiple-dose 22-patient Phase 1b trial with TNX-355, an anti-CD4 antibody, in
HIV-infected patients. In both trials, the drug was well tolerated in all dose
groups (0.3  25 mg/kg) without evidence of CD4 cell depletion. In these two
open-label, monotherapy trials (patients were on a failing HAART regimen or on
no other antiretroviral therapy), transient, clinically important (3 0.5 
1.7 log10) reductions in viral load were observed. A more definitive
assessment of efficacy will depend upon results from a planned Phase 2 trial in
which patients will be randomized to optimized background therapy (OBT) plus
TNX-355 or to OBT alone. Subject to drug availability, this Phase 2 trial is
expected to begin in the first half of 2004. On October 6, 2003, the FDA
granted fast track status designation to TNX-355.

Critical Accounting Policies




Use of Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and footnotes thereto. Actual results may differ from those
estimates.

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Revenue Recognition

Revenues from development agreements include payments for milestone
achievements and sponsored research and development costs. Milestone payments
are received under best efforts contracts and are not refundable. They are
recognized as revenue when the milestones are achieved and there are no
remaining performance obligations. Revenues for sponsored research and
development are recognized as revenue as we complete our obligations related to
such activities. Any revenue contingent upon future performance is deferred
and recognized as the performance is completed. Under our collaboration
agreements with Genentech and Novartis, we receive a royalty on the net sales
of Xolair worldwide and share in Novartis net profits from Xolair sales in the
United States. Royalty income is recorded monthly based on contractual terms
and information provided by Genentech and Novartis. Royalties are reconciled
and adjusted if actual results differ from those previously reported to us.
Revenues recognized are net of certain milestone credits and amounts due to our
former attorneys under the arbitration award.

Research and Development

Research and development expenses consist of direct costs and indirect
overhead costs, including facilities costs, salaries and related benefit costs
and material and supply costs. Expenses may also include upfront fees and
milestones paid to licensors and collaborative partners. Such amounts are
expensed as incurred. Research and development costs also include estimates
for clinical trial costs, which are based on patient enrollment and clinical
trial progress. Actual costs may differ from estimates.

Results of Operations




This discussion of our Results of Operations contains forward-looking
statements regarding revenue, research and development expenses and general and
administrative expenses.
For a discussion of the risks and uncertainties associated with our forward
looking projections, please see the Factors That May Affect Our Future
Results section in this Form 10-K.

Years Ended December 31, 2003, 2002 and 2001

Total Revenues.Our total revenues for 2003 were $18.5 million, a $17.9
million increase from 2002 primarily due to milestone revenue received upon FDA
approval of Xolair and to Xolair royalty revenue for the period July through
December 2003. Total revenues for 2002 were $560,000, a $141,000 increase from
2001 primarily due to licensing fee revenues. Revenues in 2001 were primarily
grants.

Milestone revenue for 2003 included $20.0 million in milestone revenue
associated with the FDA approval of Xolair in June 2003 per our collaboration
agreements with Novartis and Genentech. This revenue was reduced by $5.3
million of the Genentech milestone payment which is payable to our former
attorneys under the arbitration ruling. Royalty revenue of $1.9 million from
the sale of Xolair in 2003 was net of $209,000 payable to our former attorneys
under the arbitration award.

Research and Development Expenses.Research and development expense
consists of costs incurred for product development and discovery research
programs. The major components of research and development costs include
salaries and employee benefits, clinical trial expenses, clinical manufacturing
costs, consulting and other third-party costs, supplies and materials,
equipment depreciation and allocations of various overhead and facilities
costs.

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Our research and development activities can be divided into clinical stage
programs, which currently include TNX-355 and TNX-901, and research and
preclinical stage programs, which include anti-Factor D, anti-C5a antibodies
and other discovery projects. The cost associated with research and
development programs, including overhead allocation, approximate the following:

|                                        |  |                |        |      |  |      |        |  |  |   |        | 
|--------------------------------------- |  | -------------- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                                        |  | 2003           |        | 2002 |  | 2001
|                                        |  |                |        |      |  |     
|                                        |  | (in thousands)
|Clinical stage programs                 |  | $              | 15,386 |      |  | $    | 17,306 |  |  | $ | 10,759 | 
|Research and preclinical stage programs |  |                | 5,651  |      |  |      | 5,345  |  |  |   | 10,924 | 
|                                        |  |                |        |      |  |      |        |  |  |   |        | 
|Total research and development expenses |  | $              | 21,037 |      |  | $    | 22,651 |  |  | $ | 21,683 | 

Research and development expenses decreased in 2003 compared to 2002 by
$1.6 million. The decrease was primarily due to a winding down of TNX-901
development which was partially offset by increased TNX-355 development
activities. Research and development expense increased $1.0 million in 2002
compared to 2001 as a result of a significant increase in TNX-901 development
in 2002 in preparation for Phase 3 clinical trials. Spending on research and
preclinical stage programs was 50% lower in 2002 than in 2001 resulting from
the closure of our former Dutch facility (Tanox Pharma, B.V.) and a reduction
of discovery research projects.

General and Administrative Expenses.General and administrative expenses
for the year ended December 31, 2003 were $7.3 million, compared to $10.7
million in 2002 and $8.3 million in 2001. In 2003 compared to 2002, general
and administrative expense decreased by $3.3 million due to reduced litigation
spending of $2.1 million and reduced personnel related costs. This was
partially offset by increased directors and officers insurance expense.
General and administrative expenses increased in 2002 compared to 2001,
primarily due to a $2.0 million increase in litigation related expenses and
recruiting and relocation costs.

Restructuring Charge. In June 2001, Tanox recorded a $3.9 million
restructuring charge associated with the closure of the research operations of
Tanox Pharma B.V. (see Note 5. Tanox Pharma B.V. Restructuring Charge). During
2002, the estimated cost to complete these activities was reduced by $268,000.
Tanox completed the restructuring activities in April 2003.

Other Income (Expense). Other income decreased to $5.0 in 2003 from $6.5
million in 2002 and $12.1 million in 2001. This decrease was principally due
to reduced interest income in 2003 compared to 2002 and in 2002 compared to
2001 resulting from lower average interest rates and lower amounts available
for investment. In 2003, other expense also includes a loss of $348,000 on the
sale of assets associated with closing our Taiwan office in May 2003. In 2002, higher interest income was
offset by a $784,000 other-than-temporary decline in the fair value of an
available-for-sale investment.

Income Tax Benefit.During the year ended December 31, 2003, we received
a refund related to Alternative Minimum Taxes paid in 1996 and 1997 which we
recorded as a credit (benefit) to our income tax provision. There was no
provision for income taxes in 2003, 2002 or 2001, due to pre-tax losses of $4.9
million, $26.0 million and $21.4 million, respectively. These pre-tax losses
generated a tax benefit, which was fully offset by an increase in Tanoxs
valuation allowance.

Net Loss. The net loss decreased to $4.6 million in 2003 or $0.11 per
share, as compared to $26.0 million or $0.59 per share in 2002 and $21.4
million or $0.49 per share in 2001.

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Liquidity and Capital Resources




We have financed our operations since inception primarily through sales of
equity securities, collaboration and grant revenues, interest income and
equipment financing agreements. During the year ended December 31, 2000, we
sold 8,568,000 shares of common stock at $28.50 per share in an initial public
offering and received net proceeds of $225.8 million. As of December 31, 2003,
we had $227.4 million in cash, cash equivalents and investments, of which
$163.6 million were classified as current assets. At December 31, 2003, $16.0
million of cash and investments was pledged against our outstanding borrowings
under its line of credit or was deposited with the District Court in connection
with our appeal of an unfavorable arbitration ruling.

During the year ended December 31, 2003, we used milestone payments,
reimbursement of clinical trial expenses, licensing revenue, proceeds from
investment maturities, interest income and proceeds from stock option
exercises, together with cash and cash equivalents on hand at December 31,
2002, to fund operating activities and capital expenditures. The combination
of the above items and the increase in short and long-term investment
securities resulted in a net decrease in cash, cash equivalents and investments
of $556,000 (including the restricted amount of $16.0 million) for the year
ended December 31, 2003.

We have been engaged in litigation in connection with a fee dispute with
the law firms that represented us in litigation with Genentech relating to,
among other things, the intellectual property rights surrounding the
development of anti-IgE technology. An arbitration panel issued an award
entitling the attorneys to receive (i) approximately $3.5 million, including
interest, (ii) payments ranging from 33-1/3% to 40% of the future milestone
payments, in excess of the first $1 million, we would receive from Genentech
following product approval, and (iii) 10% of the royalties that we would
receive on all sales of certain anti-IgE products, including Xolair. Tanox
sought a court order vacating this arbitration award, but a judgment was
entered confirming the award, and that judgment was affirmed by the Court of
Appeals, 14th District of Texas. On October 31, 2003, the Texas Supreme Court
denied our petition for review. During the appeals process, we were required
to place amounts in escrow to secure payment of the award, and had escrowed
$9.7 million with the Harris County District Court as of December 31, 2003.
These funds, recorded as restricted cash at December 31, 2003, were released to
the former attorneys during February 2004.

In September 2002, we entered into a $16.0 million Revolving Line of
Credit Note Agreement with a bank. Under the terms of the Agreement, Tanox may
secure advances up to the aggregate principal amount of $16.0 million, the
proceeds of which can be used to finance the purchase of property, plant and
equipment. The outstanding principal balance is payable in full on September
27, 2006, and advances bear interest at the lesser of the Prime Rate or LIBOR,
the London Interbank Offered Rate, plus 1%. Accrued interest is payable on the
last day of each month. As of December 31, 2003, we had borrowed $5.0 million
under the Agreement.

From 1994 through 1998, Novartis advanced Tanox $10.0 million, pursuant to
a loan agreement, to finance our pilot manufacturing facility. Tanox has
pledged all of the assets of the pilot manufacturing facility as security for
the loan. The loan bears interest at the LIBOR rate plus 2%. Through December
31, 2001, Novartis has agreed to forgive interest on the loan. Subject to
modifications agreed to in principle concurrent with completion of the
tripartite collaboration among Tanox, Novartis and Genentech in July 1996, the
principal and future interest payments may be partially or totally forgiven by
Novartis based on the future use of the facility. Under the loan agreements,
upon activation of the facility for production, Tanox is required to make
principal and interest payments on the loan in amounts equal to 75% of net cash
flow, if any, from the facility. If the net cash flow payments during the ten
years following the date the facility first became operational are not
sufficient to repay the principal and accrued interest on the loan, Novartis
has agreed to forgive the remaining principal and accrued interest. The
facility was activated in 2002 and, until October 2002, produced clinical trial
materials for TNX-901. During 2003, the facility was used to produce clinical
trial materials for TNX-355. Accordingly, we have

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accrued interest of $320,000 and $373,000 on the loan for 2003 and 2002,
respectively. In connection with the settlement of litigation and completion
of the collaboration agreements with Novartis and Genentech in February 2004,
the principal and accrued interest on this loan were forgiven in full by
Novartis (see Item 3. Legal Proceedings).

On September 16, 2002, we purchased a 68,000 square foot office and
warehouse building adjacent to our research and manufacturing facility for $2.2
million which we are renovating into a research lab and administrative office
facility. On September 30, 2002, we purchased the 43,560 square foot research
and pilot manufacturing facility in Houston, Texas that we had been leasing,
together with approximately 15 acres of adjacent land, for $5.0 million. The
$5.0 million purchase price was funded under the bank line of credit described
above. The draw is collateralized with cash and investments at the bank. We
intend to pursue permanent financing options, including a possible sale and
lease back for both buildings.

During the year ended December 31, 2003, we invested approximately $2.6
million in equipment and facility improvements.

The following table represents Tanoxs contractual obligations as of
December 31, 2003:

|                                       |       |       |                                       |        |  |       |           |        |        |       |        |       |        |   |    |    |  |   |      |     | 
|-------------------------------------- | ----- | ----- | ------------------------------------- | ------ |  | ----- | --------- | ------ | ------ | ----- | ------ | ----- | ------ | - | -- | -- |  | - | ---- | --- | 
|                                       |       |       | Payments due by period (in thousands)
|                                       |       |       |                                       |        |  |       |           |        |        |       |        |       |        |   |    |    |  |   | More
|                                       |       |       |                                       |        |  |       | Less than |        | 1 to 3 |       | 3 to 5 |       | than 5
|Contractual Obligations                |       | Total |                                       | 1 year |  | years |           | years  |        | years
|                                       |       |       |                                       |        |  |       |           |        |        |      
|Operating Leases                       |       | $     | 144                                   |        |  | $     | 137       |        |        | $     | 4      |       |        | $ | 3  |    |  | $ |     |    
|Notes Payable                          |       |       | 15,000                                |        |  |       | 10,000    |        |        |       | 5,000  |       |        |   |   |    |  |   |     |    
|Purchase obligations
and license fees* |       |       | 5,086                                 |        |  |       | 4,486     |        |        |       | 25     |       |        |   | 75 |    |  |   | 500  |    
|                                       |       |       |                                       |        |  |       |           |        |        |       |        |       |        |   |    |    |  |   |      |    
|                                       | Total |       | $                                     | 20,230 |  |       | $         | 14,623 |        |       | $      | 5,029 |        |   | $  | 78 |  |   | $    | 500 | 
|                                       |       |       |                                       |        |  |       |           |        |        |       |        |       |        |   |    |    |  |   |      |    

*     Purchase obligations and license fees include commitments related to capital
expenditures, collaboration agreements, manufacturing and research operations.

Our current and anticipated development projects require substantial
additional capital to complete. We do not expect to generate positive cash
flow from operations until at least 2007 because we anticipate that the amount
of cash we need to fund operations, including research and development,
manufacturing and other costs, and for capital expenditures, will grow in the
future as our projects move from research to clinical development to
commercialization. We also expect that we will need to expand our clinical
development, manufacturing capacity, facilities, business development and
marketing activities to support the future development of our programs. Based
on cash projections, we expect that cash on hand and revenue from operations
will be sufficient to fund our operations for at least the next four years.
However, our future capital needs will depend on many factors, including the
successful commercialization of Xolair, progress in our research and
development activities, commercialization activities, the costs and magnitude
of product or technology acquisitions, the cost of preparing, filing,
prosecuting, maintaining and enforcing patent claims and other intellectual
property rights, competing technological and market developments, changes in or
terminations of existing collaboration and licensing arrangements, establishing
additional collaboration and licensing arrangements, potential merger and
acquisition activities, and manufacturing scale-up costs and marketing
activities, if we undertake those activities. Consequently, we may need to
raise additional funds. We do not have external committed sources of funding
and we cannot assure that we will be able to obtain additional funds on
acceptable terms, if at all. If adequate funds are not available, we may be
required to:



| |  |  | delay, reduce the scope of or eliminate one or more of
our programs;                    
| | - |  | ----------------------------------------------------------------------------------------
|
| |  |  | obtain funds through arrangements with collaboration
partners or others that may require

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| |   |  | us to relinquish rights to technologies, product candidates or
products that we would otherwise seek to develop or commercialize
ourselves; or
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | license rights to technologies, product candidates or
products on terms that are less favorable to us than might
otherwise be available.      




ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to a variety of risks, including changes in interest rates.
In the normal course of business, we have established policies and procedures
to manage these risks.

Foreign Currency Exchange Rates. We were subject to foreign currency
exchange risk because we conducted operations through two foreign subsidiaries
prior to the closing of Tanox Pharma B.V. and our Taiwan office in 2003.

Interest Rate Risk.Cash, cash equivalents and investments were
approximately $227.4 million (including the restricted cash and investments of
$16.0 million) at December 31, 2003. These assets were primarily invested in
investment grade corporate bonds and commercial paper with maturities of less
than three years, which we have the ability and intent to hold to maturity. We
do not invest in derivative securities. Although our portfolio is subject to
fluctuations in interest rates and market conditions, no gain or loss on any
security would actually be recognized in earnings unless we sell the asset. In
addition, our bank line of credit and our loan from Novartis are based on a
premium over LIBOR. As such, if general interest rates increase, our interest
costs will increase.

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##### Table of Contents






ITEM 8. Financial Statements and Supplementary Data

Tanox, Inc.
Index to Consolidated Financial Statements

|                                                                                                                  |  |      |    | 
|----------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                                  |  | PAGE
|                                                                                                                  |  |     
|Report of Independent Auditors                                                                                    |  |      | 38 | 
|Report of Independent Public Accountants                                                                          |  |      | 39 | 
|Consolidated Balance Sheets as of December 31, 2003 and 2002                                                      |  |      | 40 | 
|Consolidated Statements of Operations and Comprehensive Loss for the Years Ended
December 31, 2003, 2002 and 2001 |  |      | 41 | 
|Consolidated Statements of Stockholders Equity for the Years Ended December 31, 2003, 2002
and 2001              |  |      | 42 | 
|Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001                        |  |      | 43 | 
|Notes to Consolidated Financial Statements                                                                        |  |      | 44 | 

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Report of Independent Auditors

To the Board of Directors and Stockholders
of Tanox, Inc.:

We have audited the accompanying consolidated balance sheets of Tanox,
Inc. and subsidiaries (the Company) as of December 31, 2003 and 2002, and the
related consolidated statements of operations and comprehensive loss,
stockholders equity and cash flows for the years then ended. These financial
statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The financial statements of the Company for the year ended
December 31, 2001 were audited by other auditors who have ceased operations and
whose report dated March 8, 2002 expressed an unqualified opinion on those
statements.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Tanox, Inc.
as of December 31, 2003 and 2002, and the results of its operations and its
cash flows for the years then ended, in conformity with accounting principles
generally accepted in the United States.



| | /s/ Ernst & Young LLP
| | ---------------------

Houston, Texas
January 30, 2004,
except for Note 15,
as to which the date is
February 25, 2004

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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of
Tanox, Inc.:

We have audited the accompanying consolidated balance sheets of Tanox,
Inc., a Delaware corporation, and subsidiaries as of December 31, 2001 and
2000, and the related consolidated statements of operations and comprehensive
loss, stockholders equity and cash flows for each of the three years in the
period ended December 31, 2001. These consolidated financial statements are
the responsibility of the Companys management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Tanox,
Inc., and subsidiaries as of December 31, 2001 and 2000, and the results of
their operations and their cash flows for each of the three years in the period
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.

ARTHUR ANDERSEN LLP

Houston, Texas
March 8, 2002

THIS IS A COPY OF THE REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ISSUED BY ARTHUR
ANDERSEN LLP IN CONNECTION WITH THE ANNUAL REPORT ON FORM 10-K OF TANOX, INC.
FOR THE YEAR ENDED DECEMBER 31, 2001. THIS REPORT HAS NOT BEEN REISSUED BY
ARTHUR ANDERSEN LLP IN CONNECTION WITH THIS ANNUAL REPORT ON FORM 10-K. SEE
EXHIBIT 23.2 FOR FURTHER INFORMATION.

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TANOX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except shares and per share data)

|                                                                                                    |                                                                                                                                                                                                                         |                                            |        |              |         |      |        |         |         | 
|--------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | ------------ | ------- | ---- | ------ | ------- | ------- | 
|                                                                                                    |                                                                                                                                                                                                                         |                                            |        | December 31,
|                                                                                                    |                                                                                                                                                                                                                         |                                            |        |             
|                                                                                                    |                                                                                                                                                                                                                         |                                            |        | 2003         |         | 2002
|                                                                                                    |                                                                                                                                                                                                                         |                                            |        |              |         |     
|ASSETS                                                                                              |                                                                                                                                                                                                                         |                                            |        |              |         |      |        |        
|CURRENT ASSETS:                                                                                     |                                                                                                                                                                                                                         |                                            |        |              |         |      |        |        
|                                                                                                    | Cash and cash equivalents                                                                                                                                                                                               |                                            | $      | 46,350       |         |      | $      | 15,968  |        
|                                                                                                    | Restricted cash                                                                                                                                                                                                         |                                            |        | 10,536       |         |      |        | 4,795   |        
|                                                                                                    | Short-term investments, including restricted amounts of
$5,431 and $4,083 in 2003 and 2002, respectively                                                                                                                |                                            |        | 106,711      |         |      |        | 113,640 |        
|                                                                                                    | Interest receivable                                                                                                                                                                                                     |                                            |        | 3,002        |         |      |        | 3,230   |        
|                                                                                                    | Accounts receivable                                                                                                                                                                                                     |                                            |        | 1,706        |         |      |        | 322     |        
|                                                                                                    | Accounts receivable from related party                                                                                                                                                                                  |                                            |        | 184          |         |      |        |        |        
|                                                                                                    | Prepaid expenses and other                                                                                                                                                                                              |                                            |        | 276          |         |      |        | 332     |        
|                                                                                                    |                                                                                                                                                                                                                         |                                            |        |              |         |      |        |        
|                                                                                                    |                                                                                                                                                                                                                         | Total current assets                       |        |              | 168,765 |      |        |         | 138,287 | 
|                                                                                                    |                                                                                                                                                                                                                         |                                            |        |             
|LONG-TERM INVESTMENTS, including restricted amounts of $0 and
$5,563 in 2003 and 2002, respectively |                                                                                                                                                                                                                         |                                            | 63,837 |              |         |      | 93,587 |        
|PROPERTY, PLANT & EQUIPMENT, NET                                                                    |                                                                                                                                                                                                                         |                                            | 19,205 |              |         |      | 19,197 |        
|OTHER ASSETS                                                                                        |                                                                                                                                                                                                                         |                                            | 49     |              |         |      | 140    |        
|                                                                                                    |                                                                                                                                                                                                                         |                                            |        |              |         |      |        |        
|                                                                                                    |                                                                                                                                                                                                                         | Total assets                               |        | $            | 251,856 |      |        | $       | 251,211 | 
|                                                                                                    |                                                                                                                                                                                                                         |                                            |        |              |         |      |        |        
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                |                                                                                                                                                                                                                         |                                            |        |              |         |      |        |        
|CURRENT LIABILITIES:                                                                                |                                                                                                                                                                                                                         |                                            |        |              |         |      |        |        
|                                                                                                    | Accounts payable                                                                                                                                                                                                        |                                            | $      | 968          |         |      | $      | 1,111   |        
|                                                                                                    | Accrued liabilities                                                                                                                                                                                                     |                                            |        | 3,390        |         |      |        | 5,510   |        
|                                                                                                    | Accrued arbitration award                                                                                                                                                                                               |                                            |        | 9,841        |         |      |        | 4,074   |        
|                                                                                                    |                                                                                                                                                                                                                         |                                            |        |              |         |      |        |        
|                                                                                                    |                                                                                                                                                                                                                         | Total current liabilities                  |        |              | 14,199  |      |        |         | 10,695  | 
|                                                                                                    |                                                                                                                                                                                                                         |                                            |        |              |         |      |        |        
|LONG-TERM LIABILITIES:                                                                              |                                                                                                                                                                                                                         |                                            |        |              |         |      |        |        
|                                                                                                    | Note payable to bank                                                                                                                                                                                                    |                                            |        | 5,000        |         |      |        | 5,000   |        
|                                                                                                    | Note payable to related party                                                                                                                                                                                           |                                            |        | 10,000       |         |      |        | 10,000  |        
|                                                                                                    |                                                                                                                                                                                                                         |                                            |        |              |         |      |        |        
|                                                                                                    |                                                                                                                                                                                                                         | Total long-term liabilities                |        |              | 15,000  |      |        |         | 15,000  | 
|                                                                                                    |                                                                                                                                                                                                                         |                                            |        |              |         |      |        |        
|STOCKHOLDERS EQUITY:                                                                               |                                                                                                                                                                                                                         |                                            |        |              |         |      |        |        
|                                                                                                    | Preferred stock, $.01 par value; 10,000,000 shares authorized;
none outstanding                                                                                                                                         |                                            |        |             |         |      |        |        |        
|                                                                                                    | Common stock, $.01 par value; 120,000,000 shares authorized;
44,470,446 and 44,301,641 shares issued in 2003 and 2002,
respectively; 43,915,746 shares and 43,746,941 shares
outstanding in 2003 and 2002, respectively |                                            |        | 445          |         |      |        | 443     |        
|                                                                                                    | Additional paid-in capital                                                                                                                                                                                              |                                            |        | 311,324      |         |      |        | 310,073 |        
|                                                                                                    | Treasury
stock, at cost; 554,700 shares in 2003 and 2002                                                                                                                                                                |                                            |        | (6,261       | )       |      |        | (6,261  | )      
|                                                                                                    | Accumulated other comprehensive income                                                                                                                                                                                  |                                            |        | 694          |         |      |        | 168     |        
|                                                                                                    | Accumulated deficit                                                                                                                                                                                                     |                                            |        | (83,545      | )       |      |        | (78,907 | )      
|                                                                                                    |                                                                                                                                                                                                                         |                                            |        |              |         |      |        |        
|                                                                                                    |                                                                                                                                                                                                                         | Total stockholders equity                 |        |              | 222,657 |      |        |         | 225,516 | 
|                                                                                                    |                                                                                                                                                                                                                         |                                            |        |              |         |      |        |        
|                                                                                                    |                                                                                                                                                                                                                         | Total liabilities and stockholders equity |        | $            | 251,856 |      |        | $       | 251,211 | 
|                                                                                                    |                                                                                                                                                                                                                         |                                            |        |              |         |      |        |        

The accompanying notes are an integral part of these consolidated financial statements.

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TANOX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except per share data)

|                                                              |                                                                                                |                                    |        |                                 |        |      |         |         |        |   |         |         |        | 
|------------------------------------------------------------- | ---------------------------------------------------------------------------------------------- | ---------------------------------- | ------ | ------------------------------- | ------ | ---- | ------- | ------- | ------ | - | ------- | ------- | ------ | 
|                                                              |                                                                                                |                                    |        | For the Year Ended December 31,
|                                                              |                                                                                                |                                    |        |                                
|                                                              |                                                                                                |                                    |        | 2003                            |        | 2002 |         | 2001   
|                                                              |                                                                                                |                                    |        |                                 |        |      |         |        
|REVENUES:                                                     |                                                                                                |                                    |        |                                 |        |      |         |         |        |   |         |        
|                                                              | Development agreements and licensing fees, net
of arbitration award (see Note 4)               |                                    | $      | 13,204                          |        |      | $       | 560     |        |   | $       | 419     |       
|                                                              | Development agreements and royalties from
related party, net of arbitration award (see
Note 4) |                                    |        | 3,405                           |        |      |         |        |        |   |         |        |       
|                                                              | Royalties, net of arbitration award (see Note 4)                                               |                                    |        | 1,878                           |        |      |         |        |        |   |         |        |       
|                                                              |                                                                                                |                                    |        |                                 |        |      |         |         |        |   |         |        
|                                                              |                                                                                                | Total revenues                     |        |                                 | 18,487 |      |         |         | 560    |   |         |         | 419    | 
|                                                              |                                                                                                |                                    |        |                                 |        |      |         |         |        |   |         |        
|OPERATING COSTS AND EXPENSES:                                 |                                                                                                |                                    |        |                                 |        |      |         |         |        |   |         |        
|                                                              | Research and development                                                                       |                                    |        | 21,037                          |        |      |         | 22,651  |        |   |         | 21,683  |       
|                                                              | General and administrative                                                                     |                                    |        | 7,337                           |        |      |         | 10,677  |        |   |         | 8,349   |       
|                                                              | Restructuring charge                                                                           |                                    |        |                                |        |      |         | (268    | )      |   |         | 3,860   |       
|                                                              |                                                                                                |                                    |        |                                 |        |      |         |         |        |   |         |        
|                                                              |                                                                                                | Total operating costs and expenses |        |                                 | 28,374 |      |         |         | 33,060 |   |         |         | 33,892 | 
|                                                              |                                                                                                |                                    |        |                                 |        |      |         |         |        |   |         |        
|LOSS FROM OPERATIONS                                          |                                                                                                |                                    | (9,887 | )                               |        |      | (32,500 | )       |        |   | (33,473 | )      
|                                                              |                                                                                                |                                    |        |                                 |        |      |         |         |        |   |         |        
|OTHER INCOME (EXPENSES):                                      |                                                                                                |                                    |        |                                 |        |      |         |         |        |   |         |        
|                                                              | Interest income                                                                                |                                    |        | 5,959                           |        |      |         | 7,865   |        |   |         | 12,769  |       
|                                                              | Interest expense                                                                               |                                    |        | (451                            | )      |      |         | (595    | )      |   |         | (714    | )     
|                                                              | Other, net                                                                                     |                                    |        | (487                            | )      |      |         | (792    | )      |   |         | 41      |       
|                                                              |                                                                                                |                                    |        |                                 |        |      |         |         |        |   |         |        
|                                                              |                                                                                                | Total other income                 |        |                                 | 5,021  |      |         |         | 6,478  |   |         |         | 12,096 | 
|                                                              |                                                                                                |                                    |        |                                 |        |      |         |         |        |   |         |        
|LOSS BEFORE INCOME TAX BENEFIT                                |                                                                                                |                                    | (4,866 | )                               |        |      | (26,022 | )       |        |   | (21,377 | )      
|                                                              |                                                                                                | Income tax benefit                 |        |                                 | 228    |      |         |         |       |   |         |         |       | 
|                                                              |                                                                                                |                                    |        |                                 |        |      |         |         |        |   |         |        
|NET LOSS                                                      |                                                                                                | $                                  | (4,638 | )                               |        | $    | (26,022 | )       |        | $ | (21,377 | )      
|                                                              |                                                                                                |                                    |        |                                 |        |      |         |         |        |   |         |        
|NET LOSS PER SHARE  Basic and diluted                        |                                                                                                | $                                  | (0.11  | )                               |        | $    | (0.59   | )       |        | $ | (0.49   | )      
|                                                              |                                                                                                |                                    |        |                                 |        |      |         |         |        |   |         |        
|SHARES USED IN COMPUTING NET LOSS PER SHARE Basic
and diluted |                                                                                                |                                    | 43,979 |                                 |        |      | 43,911  |         |        |   | 44,010  |        
|                                                              |                                                                                                |                                    |        |                                 |        |      |         |         |        |   |         |        
|COMPREHENSIVE INCOME (LOSS):                                  |                                                                                                |                                    |        |                                 |        |      |         |         |        |   |         |        
|                                                              | Net loss                                                                                       |                                    | $      | (4,638                          | )      |      | $       | (26,022 | )      |   | $       | (21,377 | )     
|                                                              | Foreign currency translation adjustment                                                        |                                    |        | (168                            | )      |      |         | 84      |        |   |         | (112    | )     
|                                                              | Unrealized gain on available-for-sale security                                                 |                                    |        | 694                             |        |      |         |        |        |   |         |        |       
|                                                              |                                                                                                |                                    |        |                                 |        |      |         |         |        |   |         |        
|TOTAL COMPREHENSIVE INCOME (LOSS)                             |                                                                                                | $                                  | (4,112 | )                               |        | $    | (25,938 | )       |        | $ | (21,489 | )      
|                                                              |                                                                                                |                                    |        |                                 |        |      |         |         |        |   |         |        

The accompanying notes are an integral part of these consolidated financial statements.

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TANOX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
For the Years Ended December 31, 2003, 2002 and 2001
(In thousands, except share data)



|                            |                                                                    |  |              |         |            |   |          |   |          |   |              |       |   |   |        |        |   |   |      |     | 
|--------------------------- | ------------------------------------------------------------------ |  | ------------ | ------- | ---------- | - | -------- | - | -------- | - | ------------ | ----- | - | - | ------ | ------ | - | - | ---- | --- | 
|                            |                                                                    |  | Common Stock |         | Additional |   |          |   |          |   |              |       |  
|                            |                                                                    |  |              |         | Paid-in    |   | Treasury |   | Deferred
|                            |                                                                    |  | Shares       |         | Par Value  |   | Capital  |   | Stock    |   | Compensation
|                            |                                                                    |  |              |         |            |   |          |   |          |   |             
|BALANCES, December 31, 2000 |                                                                    |  | 43,603,955   |         |            | $ | 436      |   |          | $ | 304,647      |       |   | $ |       |        |   | $ | (555 | )  
|                            | Exercise of stock options, net                                     |  |              | 492,128 |            |   |          | 5 |          |   |              | 2,929 |   |   |        |       |   |   |      |    | 
|                            | Issuance of common stock for acquisition                           |  |              | 60,518  |            |   |          | 1 |          |   |              | 1,817 |   |   |        |       |   |   |      |    | 
|                            | Repurchase of 80,000 shares of common stock at cost                |  |              |        |            |   |          |  |          |   |              |      |   |   |        | (1,009 | ) |   |      |    | 
|                            | Capital contribution from forgiveness of interest by related
Party |  |              |        |            |   |          |  |          |   |              | 556   |   |   |        |       |   |   |      |    | 
|                            | Cancelled stock options                                            |  |              |        |            |   |          |  |          |   |              | (335  | ) |   |        |       |   |   |      | 335 | 
|                            | Amortization of deferred compensation related to stock
options     |  |              |        |            |   |          |  |          |   |              |      |   |   |        |       |   |   |      | 137 | 
|                            | Stock option compensation to non-employees                         |  |              |        |            |   |          |  |          |   |              | 278   |   |   |        |       |   |   |      |    | 
|                            | Repayment of employee loans                                        |  |              |        |            |   |          |  |          |   |              |      |   |   |        |       |   |   |      |    | 
|                            | Foreign currency translation adjustment                            |  |              |        |            |   |          |  |          |   |              |      |   |   |        |       |   |   |      |    | 
|                            | Net loss                                                           |  |              |        |            |   |          |  |          |   |              |      |   |   |        |       |   |   |      |    | 
|                            |                                                                    |  |              |         |            |   |          |   |          |   |              |       |   |   |        |        |   |   |      |    
|BALANCES, December 31, 2001 |                                                                    |  | 44,156,601   |         |            | $ | 442      |   |          | $ | 309,892      |       |   | $ | (1,009 | )      |   | $ | (83  | )  
|                            | Exercise of stock options, net                                     |  |              | 145,040 |            |   |          | 1 |          |   |              | 371   |   |   |        |       |   |   |      |    | 
|                            | Repurchase of 474,700 shares of common stock at cost               |  |              |        |            |   |          |  |          |   |              |      |   |   |        | (5,252 | ) |   |      |    | 
|                            | Amortization of deferred compensation related to stock
options     |  |              |        |            |   |          |  |          |   |              |      |   |   |        |       |   |   |      | 83  | 
|                            | Stock option compensation to non-employees                         |  |              |        |            |   |          |  |          |   |              | (190  | ) |   |        |       |   |   |      |    | 
|                            | Foreign currency translation adjustment                            |  |              |        |            |   |          |  |          |   |              |      |   |   |        |       |   |   |      |    | 
|                            | Net loss                                                           |  |              |        |            |   |          |  |          |   |              |      |   |   |        |       |   |   |      |    | 
|                            |                                                                    |  |              |         |            |   |          |   |          |   |              |       |   |   |        |        |   |   |      |    
|BALANCES, December 31, 2002 |                                                                    |  | 44,301,641   |         |            | $ | 443      |   |          | $ | 310,073      |       |   | $ | (6,261 | )      |   | $ |     |    
|                            | Exercise of stock options, net                                     |  |              | 168,805 |            |   |          | 2 |          |   |              | 1,205 |   |   |        |       |   |   |      |    | 
|                            | Stock option compensation to non-employees                         |  |              |        |            |   |          |  |          |   |              | 46    |   |   |        |       |   |   |      |    | 
|                            | Foreign currency translation adjustment                            |  |              |        |            |   |          |  |          |   |              |      |   |   |        |       |   |   |      |    | 
|                            | Unrealized gain on available-for-sale security                     |  |              |        |            |   |          |  |          |   |              |      |   |   |        |       |   |   |      |    | 
|                            | Net loss                                                           |  |              |        |            |   |          |  |          |   |              |      |   |   |        |       |   |   |      |    | 
|                            |                                                                    |  |              |         |            |   |          |   |          |   |              |       |   |   |        |        |   |   |      |    
|BALANCES, December 31, 2003 |                                                                    |  | 44,470,446   |         |            | $ | 445      |   |          | $ | 311,324      |       |   | $ | (6,261 | )      |   | $ |     |    
|                            |                                                                    |  |              |         |            |   |          |   |          |   |              |       |   |   |        |        |   |   |      |    

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                            |                                                                    |   |            |     |               |   |             |      |               |   |         |         |   |   |         |         |  
|--------------------------- | ------------------------------------------------------------------ | - | ---------- | --- | ------------- | - | ----------- | ---- | ------------- | - | ------- | ------- | - | - | ------- | ------- | -
|                            |                                                                    |   | Loans      |     | Accumulated   |   |             |      |               |   |         |         |  
|                            |                                                                    |   | Receivable |     | Other         |   |             |      |               |   | Total  
|                            |                                                                    |   | From       |     | Comprehensive |   | Accumulated |      | Stockholders
|                            |                                                                    |   | Employees  |     | Income/(Loss) |   | Deficit     |      | Equity       
|                            |                                                                    |   |            |     |               |   |             |      |              
|BALANCES, December 31, 2000 |                                                                    | $ | (442       | )   |               | $ | 196         |      |               | $ | (31,508 | )       |   | $ | 272,774 |        
|                            | Exercise of stock options, net                                     |   |            |    |               |   |             |     |               |   |         |        |   |   |         | 2,934   |  
|                            | Issuance of common stock for acquisition                           |   |            |    |               |   |             |     |               |   |         |        |   |   |         | 1,818   |  
|                            | Repurchase of 80,000 shares of common stock at cost                |   |            |    |               |   |             |     |               |   |         |        |   |   |         | (1,009  | )
|                            | Capital contribution from forgiveness of interest by related
Party |   |            |    |               |   |             |     |               |   |         |        |   |   |         | 556     |  
|                            | Cancelled stock options                                            |   |            |    |               |   |             |     |               |   |         |        |   |   |         |        |  
|                            | Amortization of deferred compensation related to stock
options     |   |            |    |               |   |             |     |               |   |         |        |   |   |         | 137     |  
|                            | Stock option compensation to non-employees                         |   |            |    |               |   |             |     |               |   |         |        |   |   |         | 278     |  
|                            | Repayment of employee loans                                        |   |            | 442 |               |   |             |     |               |   |         |        |   |   |         | 442     |  
|                            | Foreign currency translation adjustment                            |   |            |    |               |   |             | (112 | )             |   |         |        |   |   |         | (112    | )
|                            | Net loss                                                           |   |            |    |               |   |             |     |               |   |         | (21,377 | ) |   |         | (21,377 | )
|                            |                                                                    |   |            |     |               |   |             |      |               |   |         |         |   |   |         |        
|BALANCES, December 31, 2001 |                                                                    | $ |           |     |               | $ | 84          |      |               | $ | (52,885 | )       |   | $ | 256,441 |        
|                            | Exercise of stock options, net                                     |   |            |    |               |   |             |     |               |   |         |        |   |   |         | 372     |  
|                            | Repurchase of 474,700 shares of common stock at cost               |   |            |    |               |   |             |     |               |   |         |        |   |   |         | (5,252  | )
|                            | Amortization of deferred compensation related to stock
options     |   |            |    |               |   |             |     |               |   |         |        |   |   |         | 83      |  
|                            | Stock option compensation to non-employees                         |   |            |    |               |   |             |     |               |   |         |        |   |   |         | (190    | )
|                            | Foreign currency translation adjustment                            |   |            |    |               |   |             | 84   |               |   |         |        |   |   |         | 84      |  
|                            | Net loss                                                           |   |            |    |               |   |             |     |               |   |         | (26,022 | ) |   |         | (26,022 | )
|                            |                                                                    |   |            |     |               |   |             |      |               |   |         |         |   |   |         |        
|BALANCES, December 31, 2002 |                                                                    | $ |           |     |               | $ | 168         |      |               | $ | (78,907 | )       |   | $ | 225,516 |        
|                            | Exercise of stock options, net                                     |   |            |    |               |   |             |     |               |   |         |        |   |   |         | 1,207   |  
|                            | Stock option compensation to non-employees                         |   |            |    |               |   |             |     |               |   |         |        |   |   |         | 46      |  
|                            | Foreign currency translation adjustment                            |   |            |    |               |   |             | (168 | )             |   |         |        |   |   |         | (168    | )
|                            | Unrealized gain on available-for-sale security                     |   |            |    |               |   |             | 694  |               |   |         |        |   |   |         | 694     |  
|                            | Net loss                                                           |   |            |    |               |   |             |     |               |   |         | (4,638  | ) |   |         | (4,638  | )
|                            |                                                                    |   |            |     |               |   |             |      |               |   |         |         |   |   |         |        
|BALANCES, December 31, 2003 |                                                                    | $ |           |     |               | $ | 694         |      |               | $ | (83,545 | )       |   | $ | 222,657 |        
|                            |                                                                    |   |            |     |               |   |             |      |               |   |         |         |   |   |         |        

The accompanying notes are an
integral part of these consolidated financial statements.

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TANOX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

|                                                  |                                                                                            |                                                                      |                                                     |                                                     |       |                                 |          |          |       |      |          |         |       |       |         |  
|------------------------------------------------- | ------------------------------------------------------------------------------------------ | -------------------------------------------------------------------- | --------------------------------------------------- | --------------------------------------------------- | ----- | ------------------------------- | -------- | -------- | ----- | ---- | -------- | ------- | ----- | ----- | ------- | -
|                                                  |                                                                                            |                                                                      |                                                     |                                                     |       | For the Year Ended December 31,
|                                                  |                                                                                            |                                                                      |                                                     |                                                     |       |                                
|                                                  |                                                                                            |                                                                      |                                                     |                                                     |       | 2003                            |          | 2002     |       | 2001
|                                                  |                                                                                            |                                                                      |                                                     |                                                     |       |                                 |          |          |       |     
|CASH FLOWS FROM OPERATING ACTIVITIES:             |                                                                                            |                                                                      |                                                     |                                                     |       |                                 |          |          |       |      |          |        
|                                                  | Net loss                                                                                   |                                                                      | $                                                   | (4,638                                              | )     |                                 | $        | (26,022  | )     |      | $        | (21,377 | )    
|                                                  | Adjustments to reconcile net loss to net cash
provided by (used in) operating activities - |                                                                      |                                                     |                                                     |       |                                 |          |          |       |      |          |         |      
|                                                  |                                                                                            | Depreciation and amortization                                        |                                                     |                                                     | 2,231 |                                 |          |          | 2,057 |      |          |         | 1,585 |      
|                                                  |                                                                                            | Interest expense forgiven by related party                           |                                                     |                                                     |      |                                 |          |          |      |      |          |         | 556   |      
|                                                  |                                                                                            | Impairment of available-for-sale investment                          |                                                     |                                                     |      |                                 |          |          | 784   |      |          |         |      |      
|                                                  |                                                                                            | Restructuring charge                                                 |                                                     |                                                     |      |                                 |          |          | (268  | )    |          |         | 1,664 |      
|                                                  |                                                                                            | Compensation expense related to stock options                        |                                                     |                                                     | 46    |                                 |          |          | (107  | )    |          |         | 415   |      
|                                                  |                                                                                            | Loss on sale of equipment                                            |                                                     |                                                     | 348   |                                 |          |          |      |      |          |         |      |      
|                                                  |                                                                                            | In-process research and development                                  |                                                     |                                                     |      |                                 |          |          |      |      |          |         | 1,066 |      
|                                                  |                                                                                            | Other, net                                                           |                                                     |                                                     | 123   |                                 |          |          | 68    |      |          |         |      |      
|                                                  | Changes in operating assets and liabilities -                                              |                                                                      |                                                     |                                                     |       |                                 |          |          |       |      |          |         |      
|                                                  |                                                                                            |                                                                      | (Increase) decrease in receivables and other assets |                                                     |       | (1,316                          | )        |          |       | (270 | )        |         |       | 1,260 |        
|                                                  |                                                                                            |                                                                      | (Decrease) increase in current liabilities          |                                                     |       | 3,504                           |          |          |       | (129 | )        |         |       | 2,755 |        
|                                                  |                                                                                            |                                                                      |                                                     |                                                     |       |                                 |          |          |       |      |          |        
|                                                  |                                                                                            |                                                                      |                                                     | Net cash provided by (used in) operating activities |       |                                 | 298      |          |       |      | (23,887  | )       |       |       | (12,076 | )
|                                                  |                                                                                            |                                                                      |                                                     |                                                     |       |                                 |          |          |       |      |          |        
|CASH FLOWS FROM INVESTING ACTIVITIES:             |                                                                                            |                                                                      |                                                     |                                                     |       |                                 |          |          |       |      |          |        
|                                                  | Purchase of investments                                                                    |                                                                      |                                                     | (85,361                                             | )     |                                 |          | (161,011 | )     |      |          | (79,349 | )    
|                                                  | Maturities and sales of investments                                                        |                                                                      |                                                     | 122,734                                             |       |                                 |          | 72,231   |       |      |          | 207,787 |      
|                                                  | Additions to property and equipment                                                        |                                                                      |                                                     | (2,638                                              | )     |                                 |          | (9,657   | )     |      |          | (4,998  | )    
|                                                  | Proceeds from sale of equipment                                                            |                                                                      |                                                     | 51                                                  |       |                                 |          |         |       |      |          |        |      
|                                                  | Increase in restricted cash                                                                |                                                                      |                                                     | (5,741                                              | )     |                                 |          | (4,795   | )     |      |          |        |      
|                                                  |                                                                                            |                                                                      |                                                     |                                                     |       |                                 |          |          |       |      |          |        
|                                                  |                                                                                            |                                                                      |                                                     | Net cash provided by (used in) investing activities |       |                                 | 29,045   |          |       |      | (103,232 | )       |       |       | 123,440 |  
|                                                  |                                                                                            |                                                                      |                                                     |                                                     |       |                                 |          |          |       |      |          |        
|CASH FLOWS FROM FINANCING ACTIVITIES:             |                                                                                            |                                                                      |                                                     |                                                     |       |                                 |          |          |       |      |          |        
|                                                  | Proceeds from issuance of common stock                                                     |                                                                      |                                                     | 1,207                                               |       |                                 |          | 372      |       |      |          | 2,934   |      
|                                                  | Repayments of employee loans, net                                                          |                                                                      |                                                     |                                                    |       |                                 |          |         |       |      |          | 442     |      
|                                                  | Advance on Line of Credit                                                                  |                                                                      |                                                     |                                                    |       |                                 |          | 5,000    |       |      |          |        |      
|                                                  | Purchase of treasury stock                                                                 |                                                                      |                                                     |                                                    |       |                                 |          | (5,252   | )     |      |          | (1,009  | )    
|                                                  |                                                                                            |                                                                      |                                                     |                                                     |       |                                 |          |          |       |      |          |        
|                                                  |                                                                                            |                                                                      |                                                     | Net cash provided by financing activities           |       |                                 | 1,207    |          |       |      | 120      |         |       |       | 2,367   |  
|                                                  |                                                                                            |                                                                      |                                                     |                                                     |       |                                 |          |          |       |      |          |        
|IMPACT OF EXCHANGE RATES ON CASH                  |                                                                                            |                                                                      | (168                                                | )                                                   |       |                                 | 84       |          |       |      | (112     | )      
|                                                  |                                                                                            |                                                                      |                                                     |                                                     |       |                                 |          |          |       |      |          |        
|INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS  |                                                                                            |                                                                      | 30,382                                              |                                                     |       |                                 | (126,915 | )        |       |      | 113,619  |        
|CASH AND CASH EQUIVALENTS, beginning of year      |                                                                                            |                                                                      | 15,968                                              |                                                     |       |                                 | 142,883  |          |       |      | 29,264   |        
|                                                  |                                                                                            |                                                                      |                                                     |                                                     |       |                                 |          |          |       |      |          |        
|CASH AND CASH EQUIVALENTS, end of year            |                                                                                            | $                                                                    | 46,350                                              |                                                     |       | $                               | 15,968   |          |       | $    | 142,883  |        
|                                                  |                                                                                            |                                                                      |                                                     |                                                     |       |                                 |          |          |       |      |          |        
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |                                                                                            |                                                                      |                                                     |                                                     |       |                                 |          |          |       |      |          |        
|                                                  |                                                                                            | Capital contribution from forgiveness of interest by a
related party |                                                     |                                                     |      |                                 |          |          |      |      |          |         | 556   |      
|                                                  |                                                                                            | Common stock issued for acquisition                                  |                                                     |                                                     |      |                                 |          |          |      |      |          |         | 1,818 |      
|                                                  |                                                                                            | Retirement of property and equipment                                 |                                                     |                                                     |      |                                 |          |          | 874   |      |          |         |      |      
|                                                  |                                                                                            | Unrealized gain on available-for-sale security                       |                                                     |                                                     | 694   |                                 |          |          |      |      |          |         |      |      
|                                                  |                                                                                            | Cash paid during the year for interest                               |                                                     |                                                     | (115  | )                               |          |          | (36   | )    |          |         |      |      
|                                                  |                                                                                            | Cash received for Federal AMT refund                                 |                                                     |                                                     | 228   |                                 |          |          |      |      |          |         |      |      

The accompanying notes are an integral part of these consolidated financial statements.

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1.     ORGANIZATION, BUSINESS AND RISK FACTORS:

Tanox, Inc. (Tanox or the Company) is a biotechnology company that
discovers and develops therapeutic monoclonal antibodies to address significant
unmet medical needs in the areas of asthma, allergy, inflammation, diseases
affecting the human immune system and infectious diseases. Tanox was formerly
known as Tanox Biosystems, Inc. and was incorporated as a Texas corporation on
March 19, 1986. Tanox was reincorporated in January 2000 as a Delaware
corporation.

Tanox entered into a development and licensing agreement with the
predecessor to Novartis Pharma AG (Novartis) in May 1990, in which Tanox and
Novartis agreed to jointly develop, produce and market certain products for
IgE-mediated diseases, including asthma and allergy. Tanox received an initial
milestone payment upon signing the agreement and has received additional
milestone payments and reimbursement of designated expenses. Under separate
agreements, Novartis purchased 6,373,732 shares of Tanox common stock and
loaned Tanox $10 million for the construction of a pilot manufacturing
facility. Because the $10 million loan is still outstanding and the shares
owned by Novartis represent approximately 14.5% of Tanoxs outstanding common
stock at December 31, 2003, Novartis is considered a related party in Tanoxs
financial statements.

Tanox, Novartis and Genentech, Inc. (Genentech) entered into a binding
agreement-in-principle (Three-Party Collaboration) in July 1996 to combine
their existing anti-IgE antibody programs into a cooperative effort to develop
and commercialize selected anti-IgE antibodies. Xolair, whose therapeutic
effects have been validated in clinical trials in patients suffering from
allergic asthma, hay fever and perennial allergic rhinitis, is Tanoxs most
advanced product in development and is being developed under the Three-Party
Collaboration agreement. On June 20, 2003, Xolair was approved for treating
adults and adolescents with moderate to severe persistent asthma by the Food
and Drug Administration (FDA). Tanox receives royalty payments on net sales of
Xolair pursuant to the Three-Party Collaboration and will continue to receive
milestone payments upon the occurrence of specified subsequent events. Tanox
finalized the detailed terms of the three-party collaboration agreements in
February 2004 (see Note 15. Subsequent Events).

Tanox engages in research and development activities which involve a high
degree of risk and uncertainty. Tanox has not generated any revenues from
product sales, only royalty and development revenue. The ability of Tanox to
successfully develop, manufacture and market its products is dependent upon
many factors. These factors could include, but are not limited to, the need
for additional financing and the ability to develop or obtain manufacturing,
sales and marketing capabilities or collaborative arrangements. Additional
factors could include uncertainties as to patents and proprietary technologies,
efficacy and safety of its products, competition, governmental regulations and
regulatory approval.

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Tanox, Inc. and Subsidiaries
Note to Consolidated Financial Statements  (Continued)

2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Basis of Presentation

The accompanying consolidated financial statements include the accounts of
Tanox and its wholly owned subsidiaries, Tanox Pharma International, Inc.,
Tanox Pharma B.V. and TanAsia Pharma, Ltd. Intercompany transactions and
balances are eliminated in consolidation. Tanox Pharma B.V. and TanAsia Pharma
Ltd. ceased to be subsidiaries in 2003.

Use of Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and footnotes thereto. Actual results may differ from those
estimates.

Revenue Recognition

Revenues from development agreements include payments for milestone
achievements and sponsored research and development costs. Milestone payments
are received under best efforts contracts and are not refundable. They are
recognized as revenue when the milestones are achieved and there are no
remaining performance obligations. Revenues for sponsored research and
development are recognized as revenue as the Company completes its obligations
related to such activities. Any revenue contingent upon future performance is
deferred and recognized as the performance is completed. Royalty revenue
results from our collaboration agreements with Genentech and Novartis and is
recorded monthly based on contractual terms applied to reports provided by
Genentech and Novartis. The Company receives a royalty on the net sales of
Xolair in the United States and Europe and share in the profits of Xolair sales
by Novartis in the United States. Royalties are reconciled and adjusted if
actual results differ from those previously reported to us. Revenues
recognized are reduced by certain milestone credits and by certain amounts due
to our former attorneys under the arbitration award.

Cash Equivalents, Short-term and Long-term Investments

Cash equivalents consist of highly-liquid investments with original
maturities of three months or less. Management determines the appropriate
classification of its cash equivalents, short-term investments and long-term
investments at the time of purchase. Investments consist of investment grade
corporate bonds, commercial paper, asset-backed securities, and government
agency securities with maturities of less than three years from the balance
sheet date. All investments are classified as held-to-maturity and carried at
amortized cost in the accompanying financial statements with the exception of
one available-for-sale investment, which is stated at fair value based on the
quoted market price of the investment. Unrealized gains and losses on such
investments are reported as other comprehensive income (loss), which is a
separate component of stockholders equity. For the year ended December 31,
2003, the fair value of our available-for-sale investment increased by $694,000
and was recorded as an unrealized gain and is included as a component of
stockholders equity.

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Tanox, Inc. and Subsidiaries
Note to Consolidated Financial Statements  (Continued)

Restricted Cash and Investments

Tanox is required to maintain restricted cash or investments to
collateralize borrowings under Tanoxs Revolving Line of Credit Note Agreement.
Restricted cash also includes cash deposited with the Harris County District
Court to secure payment of the arbitration award with our former attorneys (see
Note. 12 Commitments and Contingencies). At December 31, 2003, Tanox had
restricted cash and investments of $16.0 million.

Fair Value of Financial Instruments

Carrying amounts of certain of the Companys financial instruments,
including cash and cash equivalents and short-term investments, approximate
fair value due to their short maturities. Based on borrowing rates currently
available to the Company for loans with similar terms, the carrying value of
the Companys debt obligations approximates fair value.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to
concentrations of credit risk are primarily cash equivalents, investments in
marketable securities and trade receivables. Cash equivalents and marketable
securities consist of money market funds, taxable commercial paper, corporate
bonds with high credit quality and U.S. government agency obligations. All
cash, cash equivalents and marketable securities are maintained with financial
institutions that management believes are credit worthy. The Companys
investment policy, approved by the Board of Directors, limits the amount the
Company may invest in any one type of investment, thereby reducing credit risk
concentrations. Ninety percent of the Companys receivables at December 31,
2003 and 75% of its revenues for the year ended December 31, 2003 are with one
large pharmaceutical company located in the United States. The Company has not
experienced any significant credit losses to date and, at December 31, 2003,
management believes that the Company has no significant concentrations of
credit risk.

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Tanox, Inc. and Subsidiaries
Note to Consolidated Financial Statements  (Continued)

Property and Equipment

Property and equipment is carried at cost and depreciated on a
straight-line basis over the estimated useful economic lives of the assets or,
in the case of leasehold improvements, over the remaining term of the lease.
The estimated useful lives used in computing depreciation are:

|                                |  |                 |  | 
|------------------------------- |  | --------------- |  | 
|                                |  | Useful lives   
|Buildings and improvements      |  | 20 years       
|Laboratory and office equipment |  | 3 to 7 years   
|Leasehold improvements          |  | length of lease
|Furniture and fixtures          |  | 5 to 7 years   

When property is retired or otherwise disposed of, the cost and
accumulated depreciation are removed from the accounts and any resulting gain
or loss is included in other income/expenses. Maintenance and repair
expenditures are charged to expense when incurred.

Property, plant and equipment balances at December 31, 2003 and 2002 are
summarized below (in thousands):

|                                                |                                   |                 |         |                 |  |   |        |        | 
|----------------------------------------------- | --------------------------------- | --------------- | ------- | --------------- |  | - | ------ | ------ | 
|Property, Plant and Equipment                   |                                   | At December 31, |         | At December 31,
|(at cost):                                      |                                   | 2003            |         | 2002           
|                                                |                                   |                 |         |                
|Land                                            |                                   | $               | 4,332   |                 |  | $ | 4,332  |       
|Building                                        |                                   |                 | 2,871   |                 |  |   | 2,556  |       
|Laboratory and office equipment                 |                                   |                 | 12,505  |                 |  |   | 13,014 |       
|Leasehold improvements                          |                                   |                 | 5,278   |                 |  |   | 4,469  |       
|Furniture and fixtures                          |                                   |                 | 416     |                 |  |   | 706    |       
|Construction in progress                        |                                   |                 | 4,012   |                 |  |   | 2,328  |       
|                                                |                                   |                 |         |                 |  |   |        |       
|                                                |                                   |                 | 29,414  |                 |  |   | 27,405 |       
|Less: Accumulated depreciation and
amortization |                                   |                 | (10,209 | )               |  |   | (8,208 | )     
|                                                |                                   |                 |         |                 |  |   |        |       
|                                                | Net property, plant and equipment |                 | $       | 19,205          |  |   | $      | 19,197 | 
|                                                |                                   |                 |         |                 |  |   |        |       

Impairment of Long-Lived Assets

Management periodically reviews long-lived assets whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. If the carrying amount of the asset is greater than its
undiscounted future operating cash flow, an impairment loss would be
recognized.

Research and Development

Research and development expenses consist of direct costs and indirect
overhead costs, including facilities costs, salaries and related benefit costs
and material and supply costs. Expenses may also include upfront fees and
milestones paid to licensors and collaborative partners. Such amounts are
expensed as incurred. Research and development costs also include estimates
for clinical trial costs, which are based on patient enrollment and clinical
trial progress. Actual costs may differ from estimates.

Income Taxes

Tanox accounts for income taxes using the liability method prescribed by
Statement of Financial

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Tanox, Inc. and Subsidiaries
Note to Consolidated Financial Statements  (Continued)

Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. Under
this method, deferred income tax assets and liabilities reflect the impact of
temporary differences between the financial accounting and tax bases of assets
and liabilities and are measured using the enacted tax rates and laws that will
be in effect when the differences are expected to reverse.

Foreign Currency Transactions and Translations

The balance sheet accounts of Tanoxs foreign subsidiaries are translated
into U.S. dollars at exchange rates in effect on reporting dates. Foreign
currency translation adjustments are reflected in other comprehensive loss.
Income statement items are translated at average exchange rates in effect
during the financial statement period. Gains and losses resulting from foreign
currency transactions denominated in currency other than the functional
currency are classified as other income /expenses.

The Company
closed its office in Taiwan in May 2003 and dissolved TanAsia, Ltd., its
Taiwan subsidiary in 2003. In 2001, the Company closed its subsidiary in the
Netherlands, Tanox Pharma B.V., and in 2003 transferred its ownership to
another entity. As a result of the dissolution of these subsidiaries, a gain
of $168,000, resulting from foreign currency transactions, was recorded in
2003.

Loss Per Share

SFAS No. 128, Earnings Per Share, requires dual presentation of basic
and diluted earnings per share (EPS). Basic EPS is computed by dividing net
income (loss) by the weighted average number of shares of common stock
outstanding during the year. Diluted EPS is computed in the same manner as
basic EPS, except that diluted EPS reflects the potential dilution that would
occur if outstanding options and warrants were exercised. Tanox incurred net
losses for the years ended December 31, 2003, 2002 and 2001; therefore, all
options outstanding for each of the years were excluded from the computation of
diluted EPS because they would have been antidilutive (see Note 11. Capital
Stock).

Segment Information

The Company currently operates in one business segment, that being the
development and commercialization of novel antibody drugs. The Company is
managed and operated as one business. The entire business is comprehensively
managed by a single management team that reports to the Chief Executive
Officer. The Company does not operate separate lines of business or separate
business entities with respect to its products or product candidates.
Accordingly, the Company does not accumulate discrete financial information
with respect to separate product areas and does not have separately reportable
segments as defined by SFAS No. 131, Disclosure about Segments of an
Enterprise and Related Information.

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Tanox, Inc. and Subsidiaries
Note to Consolidated Financial Statements  (Continued)

Stock-Based Compensation

As further discussed in Note 11, Tanox has four stock-based compensation
plans, which are accounted for under the recognition and measurement provisions
of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and Related Interpretations. Under the intrinsic value
method described in APB Opinion No. 25, no compensation expense is recognized
if the exercise price of the employee stock option equals the market price of
the underlying stock on the date of grant. Tanox recognized $0, $83,000 and
$137,000 of stock-based compensation during the years ended December 31, 2003,
2002 and 2001, respectively, which was primarily related to the grant of
options to its non-employee Scientific Advisory Board members.

Assuming the compensation cost for the stock option plans had been
determined pursuant to the fair value method under SFAS No. 123 Accounting for
Stock Based Compensation, Tanoxs pro forma net loss would have been as
follows (in thousands, except per share data):

|                                   |                                   |  |                         |        |      |  |      |         |   |  |   |         |  
|---------------------------------- | --------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                   |                                   |  | Year ended December 31,
|                                   |                                   |  |                        
|                                   |                                   |  | 2003                    |        | 2002 |  | 2001
|                                   |                                   |  |                         |        |      |  |     
|Net loss -                         |                                   |  |                         |        |      |  |      |         |   |  |   |        
|                                   | As reported                       |  | $                       | (4,638 | )    |  | $    | (26,022 | ) |  | $ | (21,377 | )
|                                   | Stock option compensation
expense |  |                         | (4,847 | )    |  |      | (4,745  | ) |  |   | (4,709  | )
|                                   |                                   |  |                         |        |      |  |      |         |   |  |   |        
|                                   | Pro forma net loss                |  | $                       | (9,485 | )    |  | $    | (30,767 | ) |  | $ | (26,086 | )
|                                   |                                   |  |                         |        |      |  |      |         |   |  |   |        
|Loss per share - Basic and diluted |                                   |  |                         |        |      |  |      |         |   |  |   |        
|                                   | As reported                       |  | $                       | (0.11  | )    |  | $    | (0.59   | ) |  | $ | (0.49   | )
|                                   | Pro forma                         |  | $                       | (0.22  | )    |  | $    | (0.70   | ) |  | $ | (0.59   | )

Recent Accounting Pronouncements

In December 2002, the FASB issued Statement of Financial Accounting
Standards, or SFAS No. 148, Accounting for Stock-Based Compensation 
Transition and Disclosure. This statement amends SFAS No. 123, Accounting
for Stock-Based Compensation, to provide alternative methods of transition for
a voluntary change to the fair value method of accounting for stock-based
employee compensation. In addition, this statement amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual
and interim financial statements about the method of accounting for employee
stock-based compensation and the effect of the method used on reported results.
The Company has elected to continue to follow the intrinsic value method of
accounting as prescribed by APB Opinion No. 25 to account for employee stock
options. The additional disclosures required under SFAS No. 148 are effective
for fiscal years ending after December 15, 2002, and have been provided herein.

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Tanox, Inc. and Subsidiaries
Note to Consolidated Financial Statements  (Continued)

3. INVESTMENTS:

Short-term and long-term investments at December 31, 2003 consist of the
following (in thousands):

|                                                            |                                           |   |         |        |            |   |            |     |       |   |           |     |   |   |         |        | 
|----------------------------------------------------------- | ----------------------------------------- | - | ------- | ------ | ---------- | - | ---------- | --- | ----- | - | --------- | --- | - | - | ------- | ------ | 
|                                                            |                                           |   |         |        |            |   | Gross      |     | Gross |   | Estimated
|                                                            |                                           |   | Book    |        | Unrealized |   | Unrealized |     | Fair 
|                                                            |                                           |   | Value   |        | Gain       |   | Loss       |     | Value
|                                                            |                                           |   |         |        |            |   |            |     |      
|Negotiable CDs:                                            |                                           |   |         |        |            |   |            |     |       |   |           |     |   |   |         |       
|                                                            | One year or less                          |   | $       | 3,035  |            |   | $          | 17  |       |   |           |    |   |   | $       | 3,052  | 
|Auction-Rate Securities:                                    |                                           |   |         |        |            |   |            |     |       |   |           |     |   |   |         |       
|                                                            | One year or less                          |   |         | 5,000  |            |   |            |    |       |   |           |    |   |   |         | 5,000  | 
|Asset-Backed Securities:                                    |                                           |   |         |        |            |   |            |     |       |   |           |     |   |   |         |       
|                                                            | One year or less                          |   |         | 3,936  |            |   |            | 6   |       |   |           |    |   |   |         | 3,942  | 
|                                                            | Greater than 1 year
and less than 3
years |   |         | 2,166  |            |   |            |    |       |   |           | (4  | ) |   |         | 2,162  | 
|Government/Agency Securities:                               |                                           |   |         |        |            |   |            |     |       |   |           |     |   |   |         |       
|                                                            | One year or less                          |   |         | 53,006 |            |   |            | 30  |       |   |           |    |   |   |         | 53,036 | 
|                                                            | Greater than 1 year
and less than 3
years |   |         | 2,000  |            |   |            | 4   |       |   |           |    |   |   |         | 2,004  | 
|Corporate Debt Securities:                                  |                                           |   |         |        |            |   |            |     |       |   |           |     |   |   |         |       
|                                                            | One year or less                          |   |         | 40,824 |            |   |            | 102 |       |   |           | (5  | ) |   |         | 40,921 | 
|                                                            | Greater than 1 year
and less than 3
years |   |         | 59,671 |            |   |            | 33  |       |   |           | (86 | ) |   |         | 59,618 | 
|                                                            |                                           |   |         |        |            |   |            |     |       |   |           |     |   |   |         |       
|Total Securities held to maturity                           |                                           |   | 169,638 |        |            |   | 192        |     |       |   | (95       | )   |   |   | 169,735 |       
|Available-for-sale investment*                              |                                           |   | 216     |        |            |   | 694        |     |       |   |          |     |   |   | 910     |       
|                                                            |                                           |   |         |        |            |   |            |     |       |   |           |     |   |   |         |        | 
|Total short- and long-term investments at
December 31, 2003 |                                           | $ | 169,854 |        |            | $ | 886        |     |       | $ | (95       | )   |   | $ | 170,645 |       
|                                                            |                                           |   |         |        |            |   |            |     |       |   |           |     |   |   |         |       



| | * |  | For the year ended December 31, 2003, the fair value of our
available-for-sale investment increased by $694,000 and an unrealized gain
is included as a component of stockholders equity.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |   |  | Short-term and long-term investments at December 31, 2002 consist of the
following (in thousands):                                                                                        

|                                                            |                                           |   |         |        |            |   |            |     |       |   |           |    |   |   |         |        | 
|----------------------------------------------------------- | ----------------------------------------- | - | ------- | ------ | ---------- | - | ---------- | --- | ----- | - | --------- | -- | - | - | ------- | ------ | 
|                                                            |                                           |   |         |        |            |   | Gross      |     | Gross |   | Estimated
|                                                            |                                           |   | Book    |        | Unrealized |   | Unrealized |     | Fair 
|                                                            |                                           |   | Value   |        | Gain       |   | Loss       |     | Value
|                                                            |                                           |   |         |        |            |   |            |     |      
|Negotiable CDs:                                            |                                           |   |         |        |            |   |            |     |       |   |           |    |   |   |         |       
|                                                            | Greater than 1 year
and less than 2       |   |         |        |            |   |            |     |       |   |           |    |   |   |         |        | 
|                                                            | years                                     |   | $       | 3,130  |            |   | $          | 20  |       |   | $         |   |   |   | $       | 3,150  | 
|Commercial Paper:                                           |                                           |   |         |        |            |   |            |     |       |   |           |    |   |   |         |       
|                                                            | One year or less                          |   |         | 7,882  |            |   |            | 3   |       |   |           |   |   |   |         | 7,885  | 
|Asset-Backed Securities:                                    |                                           |   |         |        |            |   |            |     |       |   |           |    |   |   |         |       
|                                                            | One year or less                          |   |         | 4,171  |            |   |            | 51  |       |   |           |   |   |   |         | 4,222  | 
|                                                            | Greater than 1 year
and less than 2
years |   |         | 2,454  |            |   |            | 50  |       |   |           |   |   |   |         | 2,504  | 
|Government/Agency Securities:                               |                                           |   |         |        |            |   |            |     |       |   |           |    |   |   |         |       
|                                                            | One year or less                          |   |         | 16,855 |            |   |            | 52  |       |   |           |   |   |   |         | 16,907 | 
|                                                            | Greater than 1 year
and less than 2
years |   |         | 51,100 |            |   |            | 927 |       |   |           |   |   |   |         | 52,027 | 
|Corporate Debt Securities:                                  |                                           |   |         |        |            |   |            |     |       |   |           |    |   |   |         |       
|                                                            | One year or less                          |   |         | 84,516 |            |   |            | 581 |       |   |           | (5 | ) |   |         | 85,092 | 
|                                                            | Greater than 1 year
and less than 2
years |   |         | 36,903 |            |   |            | 568 |       |   |           | (2 | ) |   |         | 37,469 | 
|                                                            |                                           |   |         |        |            |   |            |     |       |   |           |    |   |   |         |       
|Total Securities held to maturity                           |                                           |   | 207,011 |        |            |   | 2,252      |     |       |   | (7        | )  |   |   | 209,256 |       
|Available-for-sale security                                 |                                           |   | 216     |        |            |   |           |     |       |   |          |    |   |   | 216     |       
|                                                            |                                           |   |         |        |            |   |            |     |       |   |           |    |   |   |         |       
|Total short- and long-term investments at
December 31, 2002 |                                           | $ | 207,227 |        |            | $ | 2,252      |     |       | $ | (7        | )  |   | $ | 209,472 |       
|                                                            |                                           |   |         |        |            |   |            |     |       |   |           |    |   |   |         |       

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Tanox, Inc. and Subsidiaries
Note to Consolidated Financial Statements  (Continued)

During 2002, the Company sold two corporate securities with a total book
value of $2.5 million prior to their stated maturity for a net gain of $12,000,
which is included in interest income on the consolidated statement of
operations. The decision to sell these securities was based upon the decline
in the credit rating of such securities, which no longer conformed to our
investment policy.

4.     REVENUES:

Development Agreements and Licensing Fees. Revenues from development
agreements in 2003 include reimbursement by our collaboration partners,
Genentech and Novartis, of selected costs incurred in the development of
TNX-901. Year to date development agreement revenues include $20.0 million of
Xolair milestone payments received from the same collaboration partners. This
revenue was reduced by $5.3 million of the Genentech milestone payment which is
due to our former attorneys under the arbitration award (see Note 12.
Commitments and Contingencies). Licensing fee revenue includes payments
received in exchange for rights to license and sublicense Tanoxs technology or
product rights. In December 2003, Tanox received $1.0 million from Wyeth
Pharmaceuticals Division, a division of Wyeth, as an upfront payment related to
a patent license agreement to develop new classes of drugs for the treatment of
osteoporosis and/or other non-oncologic bone-related diseases or disorders.

Royalties.Tanox receives a royalty on the net sales of Xolair by
Genentech and Novartis. Genentech reported Xolair sales of $25.3 million for
2003, which is the Companys basis for estimating royalty revenue. Estimated
royalties include certain credits for prior milestone payments made to Tanox
and are net of amounts which are payable by Tanox to its former attorneys
(see Note 12. Commitments and Contingencies).

Since 1999, Tanox has accrued all amounts that would have been payable to
its former attorneys under the arbitration award with respect to milestones
received from Genentech. Any amounts payable to the former attorneys relating
to royalties on Xolair will depend on the level of Xolair sales and the amount
of royalties actually received by Tanox from Genentech and Novartis. Inclusive
of the payments to the former attorneys, Tanox expects to receive approximately
8% to 12% of net worldwide sales of Xolair in the form of royalties and profit
sharing. Certain milestone credits against royalties and profit sharing may
cause the overall rate to fall below this range in 2004.

5.     TANOX PHARMA B.V. RESTRUCTURING CHARGE:

In April 2003, Tanox and the former shareholders of Tanox Pharma B.V.
entered into an agreement to settle the litigation related to the acquisition
of Tanox Pharma B.V. by Tanox. For its part of the settlement, Tanox paid a
cash amount, which was accrued in its financial statements at December 31,
2002, and agreed to transfer all of the stock of Tanox Pharma B.V to certain of
the former shareholders. Tanox Pharma B.V. holds the rights to the anti-CD40
project (or TNX-100).

Tanox recorded a restructuring charge in June 2001, in connection with the
closing of the Tanox Pharma B.V. operation in the Netherlands and the
consolidation of Tanoxs research operations into a single site at its
headquarters in Houston. In connection with the settlement of the litigation,
Tanox completed the restructuring activity in April 2003.

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Tanox, Inc. and Subsidiaries
Note to Consolidated Financial Statements  (Continued)

6.     COLLABORATION AND LICENSE AGREEMENTS:

Genentech Inc. and Novartis Pharma, AG.In 1990, Tanox entered into a
Development and Licensing agreement with Ciba Geigy, AG (now Novartis Pharma,
AG.) to jointly develop anti-IgE antibodies to treat allergic diseases. In
connection with the settlement of a lawsuit in 1996, Genentech joined the
collaboration for the purpose of developing certain anti-IgE antibodies. The
Company may receive up to an additional $25 million in Xolair-related milestone
payments of which $7.2 million would be payable to Tanoxs former attorneys and
$2.5 million would be creditable against future royalty payments.

In the United States, Tanox receives royalties on sales of Xolair and
other collaboration products and will receive a share of Novartis profits on
these sales. Tanox shares equally with Novartis the net profits and the net
losses from sales of Xolair and other collaboration products in China, Hong
Kong, Korea, Singapore and Taiwan. These royalty and profit-sharing payments
will be reduced by certain milestone and other credits, which, at December 31,
2003, approximated $6.1 million. In addition, 10% of all royalties received by
Tanox from sales of Xolair and other collaboration products will be payable to
Tanoxs former attorneys, up to $300.0 million, as a result of the arbitration
award (see Note 4. Revenues).

Novartis and Genentech are responsible for manufacturing Xolair and other
selected anti-IgE products worldwide. In consideration for relinquishing any
rights to manufacture up to 50% of the worldwide requirements of those
products, Tanox will receive quarterly payments from Novartis or Genentech
based on the quantity of product manufactured and vialed (see Note 15. Subsequent Events).

Biogen IDEC, Inc.In 1998, Tanox entered into an agreement to license
from Biogen, Inc. (now Biogen IDEC, Inc.) its anti-CD4 monoclonal antibody and
intellectual property on an exclusive worldwide basis with limited sublicense
rights. Biogen owns issued U.S., European, Canadian and Australian patents and
has pending applications in Japan, which cover our TNX-355 product. The
Company paid Biogen a license fee and agreed to make additional development
milestone payments and royalty payments to Biogen based on annual net sales
revenue levels. If certain milestones are met, the Company may make up to an
aggregate of $1.4 million (or $10.4 million in the event Tanox merges or
affiliates with a company similar in size to Biogen) in product license fees
and development milestone payments under this agreement, of which the Company
has paid $200,000. The license terminates on a country-by-country basis on the
later of the expiration of 12 years following the first commercial product sale
or the expiration or invalidity of applicable patents.

Protein Design Labs, Inc.In 2000, Tanox entered into an agreement with
Protein Design Labs, Inc. (PDL) to acquire the right to non-exclusive licenses
to patents and patent applications owned by PDL for up to four of the Companys
antibodies. Under the agreement, the Company paid initial license fees to PDL
of $2.5 million, in addition to $1.5 million that was paid to PDL in 1998 under
a prior licensing agreement, and must exercise the option for license not later
than March 17, 2005. If the Company exercises its options to license PDLs
patents for all four antibodies, the Company agreed to pay PDL up to $4.0
million ($1.0 million per antibody), plus maintenance fees. In addition, the
Company agreed to pay royalties on future sales if a product using the PDL
technology is successfully commercialized. The Company has not exercised its
option for any of the Companys antibodies.

Wyeth.In November 2003, the Company entered into cross licensing
agreements with Wyeth Pharmaceuticals, a division of Wyeth, with respect to
patent rights covering a new class of drugs for the treatment of osteoporosis
and/or other non-oncologic bone-related diseases or disorders. Under the
agreements, Wyeth received a license under Tanox patents to develop a small
molecule-based drug, and

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Tanox, Inc. and Subsidiaries
Note to Consolidated Financial Statements  (Continued)

Tanox received a license under Wyeths patent applications to develop an
antibody-based drug. The research is based on a Tanox patented proprietary
target gene. Tanox may receive milestone and royalty payments from
Wyeth-developed products and may pay Wyeth milestones and royalties from
Tanox-developed products. Tanox received an upfront license payment of $1.0
million from Wyeth.

7.     ACCRUED LIABILITIES:

Accrued liabilities at December 31, 2003 and 2002, consist of the
following (in thousands):

|                                       |  |      |       |      |  |   |       | 
|-------------------------------------- |  | ---- | ----- | ---- |  | - | ----- | 
|                                       |  | 2003 |       | 2002
|                                       |  |      |       |     
|Accrued payroll                        |  | $    | 761   |      |  | $ | 743   | 
|Accrued vacation                       |  |      | 290   |      |  |   | 309   | 
|Accrued taxes                          |  |      | 709   |      |  |   | 785   | 
|Accrued restructuring                  |  |      |      |      |  |   | 293   | 
|Accrued legal and professional fees    |  |      | 394   |      |  |   | 1,209 | 
|Accrued interest                       |  |      | 693   |      |  |   | 373   | 
|Accrued clinical trial costs           |  |      | 384   |      |  |   | 339   | 
|Accrued litigation related liabilities |  |      |      |      |  |   | 653   | 
|Other                                  |  |      | 159   |      |  |   | 806   | 
|                                       |  |      |       |      |  |   |       | 
|                                       |  | $    | 3,390 |      |  | $ | 5,510 | 
|                                       |  |      |       |      |  |   |       | 

8.     NOTES PAYABLE:

Note Payable to Bank. Tanox borrowed $5.0 million in September 2002 from
a bank under a $16.0 million Revolving Line of Credit Note Agreement (LOC
Agreement). Under the term of the LOC Agreement, Tanox may secure advances up
to the aggregate principal amount of $16.0 million, the proceeds of which can
be used to finance the purchase of property, plant and equipment. The
outstanding balance is payable in full on September 27, 2006, and advances bear
interest at the lesser of the Prime Rate or LIBOR plus 1%, which at December
31, 2003 and 2002 was 2.25% and 2.5%, respectively. The Note is collateralized
with cash and investments equal to or greater than 100% of the outstanding
principal balance of the Note.

Note Payable to Related Party. Novartis loaned Tanox $10.0 million
pursuant to the agreement discussed in Note 1 to finance a pilot manufacturing
facility. The loan bears interest at LIBOR plus 2%, which at December 31, 2003
and 2002 was 3.2% and 3.5%, respectively. Tanox has pledged all of the assets
of the pilot manufacturing facility, whose net book value approximates $2.7
million at December 31, 2003, as security for the loan. Subject to
modifications agreed to in principle concurrent with formation of the
Three-Party Collaboration, the principal and future interest payments may be
partially or totally forgiven by Novartis based on the future use of the
facility. Through December 31, 2001, Novartis has agreed to forgive interest
on the loan. For the year ended December 31, 2001, the interest forgiven by
Novartis of $556,000 has been recorded as interest expense and a capital
contribution. For the years ended December 31, 2003 and 2002, a liability of
$320,000 and $373,000, respectively, has been recorded as interest expense (see
Note. 15 Subsequent Events).

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Tanox, Inc. and Subsidiaries
Note to Consolidated Financial Statements  (Continued)

9.     INCOME TAXES:

Tanoxs pretax income (loss) consists of the following (in thousands):

|        |  |      |        |      |  |      |         |   |  |   |         |  
|------- |  | ---- | ------ | ---- |  | ---- | ------- | - |  | - | ------- | -
|        |  | 2003 |        | 2002 |  | 2001
|        |  |      |        |      |  |     
|U.S     |  | $    | 119    |      |  | $    | (20,084 | ) |  | $ | (24,451 | )
|Foreign |  |      | (4,985 | )    |  |      | (5,938  | ) |  |   | 3,074   |  
|        |  |      |        |      |  |      |         |   |  |   |         |  
|        |  | $    | (4,866 | )    |  | $    | (26,022 | ) |  | $ | (21,377 | )
|        |  |      |        |      |  |      |         |   |  |   |         |  

The components of the provision/(benefit) for income taxes are as follows
(in thousands):

|         |  |      |      |      |  |      |   |  |  |   |   | 
|-------- |  | ---- | ---- | ---- |  | ---- | - |  |  | - | - | 
|         |  | 2003 |      | 2002 |  | 2001
|         |  |      |      |      |  |     
|Current  |  | $    | (228 | )    |  | $    |  |  |  | $ |  | 
|Deferred |  |      |     |      |  |      |  |  |  |   |  | 
|         |  |      |      |      |  |      |   |  |  |   |   | 
|         |  | $    | (228 | )    |  | $    |  |  |  | $ |  | 
|         |  |      |      |      |  |      |   |  |  |   |   | 

For 2003, 2002 and 2001 the effective income tax provision varied from
that computed at the statutory federal income tax rate of 35% primarily due to
an increase in the valuation allowance and nondeductible foreign losses.

Significant components of Tanoxs deferred tax assets at December 31 are
as follows (in thousands):

|                                               |                           |   |         |        |      |   |         |        | 
|---------------------------------------------- | ------------------------- | - | ------- | ------ | ---- | - | ------- | ------ | 
|                                               |                           |   | 2003    |        | 2002
|                                               |                           |   |         |        |     
|Federal NOL carryforwards                      |                           | $ | 28,191  |        |      | $ | 26,085  |       
|In-process research and development            |                           |   | 1,335   |        |      |   | 1,335   |       
|Foreign NOL carryforwards                      |                           |   | 6,235   |        |      |   | 4,490   |       
|Deferred compensation related to stock options |                           |   | 2,225   |        |      |   | 2,268   |       
|Research and development tax credit            |                           |   | 3,561   |        |      |   | 2,824   |       
|Alternative minimum tax credit                 |                           |   | 20      |        |      |   | 20      |       
|Accruals not currently deductible              |                           |   | 323     |        |      |   | 2,254   |       
|Capitalized research                           |                           |   | 875     |        |      |   | 875     |       
|Other, net                                     |                           |   | 179     |        |      |   | 213     |       
|                                               |                           |   |         |        |      |   |         |       
|                                               | Total deferred tax assets |   |         | 42,944 |      |   |         | 40,364 | 
|Differences in book and tax depreciation       |                           |   | (634    | )      |      |   | (587    | )     
|Deferred tax valuation allowance               |                           |   | (42,310 | )      |      |   | (39,777 | )     
|                                               |                           |   |         |        |      |   |         |       
|                                               | Net deferred taxes        |   | $       |       |      |   | $       |       | 
|                                               |                           |   |         |        |      |   |         |       

At December 31, 2003, Tanox had federal regular tax NOL carryforwards and
alternative minimum tax NOL carryforwards of approximately $80.5 million and
$81.0 million, respectively, which will begin to expire in 2019. Tanox also
had a foreign NOL carryforward of approximately $17.8 million which will be
available to offset the separate company taxable income of certain foreign
subsidiaries. Additionally, Tanox has an unused U.S. research and development
tax credit carryforward at December 31, 2003, of approximately $3.6 million,
which began to expire in 2002. Tanox also has alternative minimum tax credit
carryforwards of approximately $20,000 as of December 31, 2003. As Tanox has
incurred cumulative losses to date and there is no assurance of future taxable
income, a valuation

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Tanox, Inc. and Subsidiaries
Note to Consolidated Financial Statements  (Continued)

allowance has been established to fully offset the net deferred tax asset
at December 31, 2003 and 2002. Tanoxs valuation allowance increased to $42.3
million at December 31, 2003, from $39.7 million at December 31, 2002,
primarily due to Tanoxs increase in NOL carryforwards. Approximately $14.4
million of the valuation allowance relates to tax benefits for stock option
deductions included in the net operating loss carryforward, which when realized
will be allocated directly to contributed capital to the extent the benefits
exceed amounts attributable to deferred compensation expense.

10.     LEASE OBLIGATIONS:

Tanox leases equipment and office space (for its corporate headquarters)
under non-cancelable operating leases. These leases expire at various dates
through 2008. Future minimum lease obligations under non-cancelable leases at
December 31, 2003, are as follows (in thousands):

|                         |      |       |   |     |     | 
|------------------------ | ---- | ----- | - | --- | --- | 
|Year ending December 31- |      |       |   |    
|                         | 2004 |       | $ | 137 |    
|                         | 2005 |       |   | 2   |    
|                         | 2006 |       |   | 2   |    
|                         | 2007 |       |   | 2   |    
|                         | 2008 |       |   | 1   |    
|                         |      |       |   |    
|                         |      | Total |   | $   | 144 | 
|                         |      |       |   |    

Tanox incurred rent expense of $439,000, $598,000 and $572,000 in 2003,
2002 and 2001, respectively. In September 2002, Tanox purchased the 43,560
square feet research and pilot manufacturing facility it had previously leased.
In 2002, Tanox acquired a 68,000 square foot office and warehouse building
adjacent to its existing facility, which it is renovating into a research lab
and administrative office building. Tanoxs corporate administrative offices
currently occupy approximately 13,100 square feet in Houston, Texas under a
lease that expires on March 31, 2004, at which time the Company will relocate
its corporate administration, clinical development and research groups to the
newly renovated lab and office facility.

11.     CAPITAL STOCK:

Preferred Stock

Tanox is authorized to issue up to 10,000,000 shares of $.01 par value
preferred stock. The board of directors has the authority to issue these
shares in one or more series and to establish the rights, preferences and
dividends for the shares. No shares of preferred stock have been issued.

Stockholder Rights Agreement

On July 27, 2001, the board of directors of Tanox declared a dividend of
one right for each outstanding share of the common stock of record at the close
of business on August 10, 2001. Each right entitles the registered holder to
purchase a unit consisting of one one-hundredth of a share (a Fractional Share)
of Series A Junior Participating Preferred Stock, par value $0.01 per share, at
a purchase price of $140 per Fractional Share, subject to adjustment. The
rights generally become exercisable if an acquiring party accumulates 20% or
more of the common stock and, in such event, the holders of the rights (other
than the acquiring person) would be entitled to purchase either Tanoxs stock
or shares in an acquiring entity at half of market value. Tanox is generally
entitled to redeem the rights at $0.01 per right at any

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Tanox, Inc. and Subsidiaries
Note to Consolidated Financial Statements  (Continued)

time until the tenth day following the time the rights become exercisable.
The rights will expire on August 10, 2011.

Treasury Stock

In September 2001, the board of directors of Tanox authorized the
repurchase, at managements discretion, of up to $4.0 million of Tanox common
stock. In June 2002, the board authorized the purchase of an additional $3.0
million pursuant to the stock repurchase program. As of December 31, 2003, the
Company has purchased a total of 554,700 shares at an aggregate cost of $6.3
million. The average repurchased share price was $11.29.

Stock Options

In 1987, Tanox established the 1987 Stock Option Plan (the 1987 Plan)
covering key employees, officers and directors of Tanox. Under the terms of
the 1987 Plan, as amended, the number of shares of common stock eligible for
issuance was 4,320,000. Options issued under the 1987 Plan were generally
granted at a purchase price equal to the fair market value at the date of grant
and are generally exercisable beginning two years after the date of grant for
40% of the shares, with the balance to become exercisable cumulatively in three
installments of 20% each year thereafter. Options expire ten years after the
date of grant. At December 31, 2003, options to purchase 307,660 shares of
common stock were outstanding under the 1987 Plan. The 1987 Plan expired June
24, 1997, and no more shares may be granted under this plan.

Tanox established the 1997 Stock Plan (the 1997 Plan) in November 1997.
Under the terms of the 1997 Plan, Tanox may grant options to purchase up to
8,000,000 shares of common stock to employees, directors, advisors and
consultants. The 1997 Plan also provides for several types of grants including
incentive stock options, non-qualified stock options, stock appreciation
rights, stock awards, stock purchases and performance units. Incentive stock
options provide the right to purchase common stock at a price not less than
100% of the fair value of common stock on the date of the grant. Non-qualified
stock options provide the right to purchase common stock at a price not less
than 50% of the fair value of the common stock on the date of the grant. The
options granted under the 1997 Plan generally expire ten years after date of
grant and are generally completely exercisable five years after the grant date.
At December 31, 2003, options to purchase 1,628,152 shares of common stock
were outstanding under the 1997 Plan, and 5,991,972 shares were available for
future grants. The 1997 Plan will expire on October 31, 2007.

In January 1992, Tanox established the 1992 Non-Employee Directors Stock
Options Plan (the 1992 Directors Plan) and reserved 480,000 shares of common
stock for issuance upon the exercise of options granted pursuant to the 1992
Directors Plan. Unless otherwise provided, options granted under the 1992
Directors Plan will vest one-third annually from the date of grant. The
exercise price of the options granted will be determined by a committee
appointed by Tanoxs board of directors. At December 31, 2003, options to
purchase 43,400 shares of common stock were outstanding under the 1992
Directors Plan. The 1992 Directors Plan expired on January 10, 2002, and no
more shares may be granted under this plan.

In February 2000, Tanox established the 2000 Non-Employee Directors Stock
Option Plan (the 2000 Directors Plan) and reserved 500,000 shares of common
stock for issuance under the plan. Under the original Plan, non-employee
directors joining the board after April 6, 2000, automatically received a stock
option to purchase 15,000 shares upon initial election or appointment. Each
such director also received a stock option to purchase an additional 5,000
shares upon their re-election to the board. The

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Tanox, Inc. and Subsidiaries
Note to Consolidated Financial Statements  (Continued)

2000 Directors Plan was amended in May 2001. As amended, the plan
provides that non-employee directors joining the board after May 31, 2001,
automatically receive an option to purchase an equivalent number of shares of
common stock having a Black-Scholes model value of $200,000. Non-employee
directors also receive, immediately following any annual meeting of
stockholders at which directors are elected (beginning with the 2002 annual
meeting), an option to purchase an equivalent number of shares of common stock
having a Black-Scholes model value of $80,000, provided that the director did
not receive an initial grant under the plan within the prior six months. All
grants under the 2000 Directors Plan have a term of ten years, are issued at
fair market value and vest 1/36 per month from the date of grant over three
years. At December 31, 2003, options to purchase 68,200 shares of common stock
were outstanding under the 2000 Directors Plan, and 431,800 shares were
available for future grants.

The following table summarizes stock option transactions since December
31, 2000:

|                               |           |  |           |          |                |   |                |               |                  |   |       |       | 
|------------------------------ | --------- |  | --------- | -------- | -------------- | - | -------------- | ------------- | ---------------- | - | ----- | ----- | 
|                               |           |  | Number of |          |                |   |                |               | Weighted Average
|                               |           |  | Shares    |          | Exercise Price |   | Exercise Price
|                               |           |  |           |          |                |   |               
|Outstanding, December 31, 2000 |           |  | 1,980,637 |          |                |   | 0.63  48.00   |               |                  |   | 16.38 |      
|                               | Granted   |  |           | 750,800  |                |   |                | 12.74  36.31 |                  |   |       | 22.25 | 
|                               | Exercised |  |           | (492,128 | )              |   |                | 0.63  12.50  |                  |   |       | 5.96  | 
|                               | Canceled  |  |           | (226,713 | )              |   |                | 3.75  38.50  |                  |   |       | 9.59  | 
|                               |           |  |           |          |                |   |                |               |                  |   |       |      
|Outstanding, December 31, 2001 |           |  | 2,012,596 |          |                |   | 0.83  48.00   |               |                  |   | 21.88 |      
|                               | Granted   |  |           | 751,675  |                |   |                | 9.54  18.50  |                  |   |       | 13.34 | 
|                               | Exercised |  |           | (145,040 | )              |   |                | 0.83  12.50  |                  |   |       | 2.38  | 
|                               | Canceled  |  |           | (541,472 | )              |   |                | 11.53  31.55 |                  |   |       | 28.52 | 
|                               |           |  |           |          |                |   |                |               |                  |   |       |      
|Outstanding, December 31, 2002 |           |  | 2,077,759 |          |                |   | 1.04  48.00   |               |                  |   | 18.42 |      
|                               | Granted   |  |           | 456,100  |                |   |                | 8.06  20.36  |                  |   |       | 9.28  | 
|                               | Exercised |  |           | (168,805 | )              |   |                | 1.04  17.52  |                  |   |       | 7.15  | 
|                               | Canceled  |  |           | (315,542 | )              |   |                | 8.06  47.31  |                  |   |       | 18.96 | 
|                               |           |  |           |          |                |   |                |               |                  |   |       |      
|Outstanding, December 31, 2003 |           |  | 2,049,512 |          |                |   | 1.04  48.00   |               |                  |   | 17.24 |      
|                               |           |  |           |          |                |   |                |               |                  |   |       |      
|Exercisable, December 31, 2003 |           |  | 824,752   |          |                | $ | 1.04  48.00   |               |                  | $ | 18.76 |      
|                               |           |  |           |          |                |   |                |               |                  |   |       |      

The following table summarizes information about fixed-price stock options
outstanding at December 31, 2003:

|                         |  |                        |           |                        |  |          |     |             |  |          |       |        |  |  |         |  |  |   |       | 
|------------------------ |  | ---------------------- | --------- | ---------------------- |  | -------- | --- | ----------- |  | -------- | ----- | ------ |  |  | ------- |  |  | - | ----- | 
|                         |  | Options Outstanding at |           | Options Exercisable at
|                         |  | December 31, 2003      |           | December 31, 2003     
|                         |  |                        |           |                       
|                         |  |                        |           |                        |  | Weighted |     |             |  |          |       | No. of |  |  |         | 
|                         |  | No. of                 |           | Average                |  | Weighted |     | Shares      |  | Weighted
|                         |  | Shares                 |           | Remaining              |  | Average  |     | Subject to  |  | Average 
|                         |  | Subject to             |           | Contractual            |  | Exercise |     | Exercisable |  | Exercise
|Range of Exercise Prices |  | Options                |           | Life(in Yrs)           |  | Price    |     | Options     |  | Price   
|                         |  |                        |           |                        |  |          |     |             |  |         
|$  0.83    9.60         |  |                        | 733,970   |                        |  |          | 6.4 |             |  | $        | 7.72  |        |  |  | 351,520 |  |  | $ | 7.21  | 
|$  9.60  14.40          |  |                        | 626,442   |                        |  |          | 8.1 |             |  |          | 13.19 |        |  |  | 139,090 |  |  |   | 13.18 | 
|$14.40  19.20           |  |                        | 248,972   |                        |  |          | 7.8 |             |  |          | 17.00 |        |  |  | 93,232  |  |  |   | 17.05 | 
|$19.20  28.80           |  |                        | 56,628    |                        |  |          | 4.6 |             |  |          | 23.11 |        |  |  | 32,390  |  |  |   | 24.96 | 
|$28.80  38.40           |  |                        | 201,500   |                        |  |          | 6.9 |             |  |          | 36.69 |        |  |  | 99,320  |  |  |   | 36.76 | 
|$38.40  48.00           |  |                        | 182,000   |                        |  |          | 6.3 |             |  |          | 46.40 |        |  |  | 109,200 |  |  |   | 46.04 | 
|                         |  |                        |           |                        |  |          |     |             |  |          |       |        |  |  |         |  |  |   |       | 
|                         |  |                        | 2,049,512 |                        |  |          | 7.1 |             |  |          | 17.24 |        |  |  | 824,752 |  |  |   | 18.76 | 
|                         |  |                        |           |                        |  |          |     |             |  |          |       |        |  |  |         |  |  |   |       | 

Tanox follows SFAS No. 123, which requires a fair value based method of
accounting for employee stock options or allows an entity to continue to
account for its employee stock options using the

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Tanox, Inc. and Subsidiaries
Note to Consolidated Financial Statements  (Continued)

intrinsic value based method of accounting prescribed by APB No. 25.
SFAS No. 123 requires Tanox to disclose the income statement effect of the
alternative fair value method assuming Tanox was required to record
compensation expense for stock options equal to the assumed fair value on the
grant date.

The proforma information regarding net loss required by SFAS No. 123 has
been included in Note 2. The fair value of each option grant is estimated
using the Black-Scholes option-pricing model. The Black-Scholes model uses
grant prices, as stated in the option agreements, market price as established
by stock sales and deemed market prices established by the Compensation
Committee of Tanoxs board of directors prior to Tanoxs initial public
offering (IPO) and fair market value established by closing prices on the
NASDAQ Stock Market following the IPO. The following assumptions were used in
the Black-Scholes option-pricing model:

|                          |  |         |      |         |  |         |      |   |  |  |      |  
|------------------------- |  | ------- | ---- | ------- |  | ------- | ---- | - |  |  | ---- | -
|                          |  | 2003    |      | 2002    |  | 2001   
|                          |  |         |      |         |  |        
|Expected dividend yield   |  |         |     |         |  |         |     |   |  |  |     |  
|Expected price volatility |  |         | 74.0 | %       |  |         | 80.0 | % |  |  | 51.0 | %
|Risk-free interest rate   |  |         | 2.54 | %       |  |         | 2.21 | % |  |  | 3.00 | %
|Expected life of option   |  | 4 years |      | 4 years |  | 5 years
|Expected turnover         |  |         | 10.0 | %       |  |         | 7.0  | % |  |  | 5.0  | %

The number and weighted average fair value of options granted in 2003,
2002 and 2001 is as follows:

|                                                     |  |        |         |            |  |          |       |            |  |        |         |            |  |   |       |  |  |          |         |  |  |   |       | 
|---------------------------------------------------- |  | ------ | ------- | ---------- |  | -------- | ----- | ---------- |  | ------ | ------- | ---------- |  | - | ----- |  |  | -------- | ------- |  |  | - | ----- | 
|                                                     |  | 2003   |         | 2002       |  | 2001    
|                                                     |  |        |         |            |  |         
|                                                     |  |        |         |            |  | Weighted |       |            |  |        |         | Weighted   |  |   |       |  |  | Weighted
|                                                     |  |        |         |            |  | Average  |       |            |  |        |         | Average    |  |   |       |  |  | Average 
|                                                     |  | Shares |         | Fair Value |  | Shares   |       | Fair Value |  | Shares |         | Fair Value
|                                                     |  |        |         |            |  |          |       |            |  |        |         |           
|Option exercise
price equals fair
market value       |  |        | 432,100 |            |  | $        | 8.98  |            |  |        | 727,025 |            |  | $ | 13.26 |  |  |          | 727,972 |  |  | $ | 10.59 | 
|Option exercise
price greater than
fair market value |  |        | 24,000  |            |  | $        | 14.63 |            |  |        | 7,500   |            |  | $ | 11.05 |  |  |          | 22,828  |  |  | $ | 7.83  | 
|Option exercise
price less than
fair market value    |  |        |        |            |  | $        |      |            |  |        | 17,150  |            |  | $ | 17.41 |  |  |          |        |  |  | $ |      | 

Reserved Shares

The Company has reserved shares of common stock for future issuance of
stock options under plans, all of which have been approved by stockholders, as
follows at December 31, 2003:

|                           |  |  |           | 
|-------------------------- |  |  | --------- | 
|Outstanding options        |  |  | 2,049,512 | 
|Reserved for future grants |  |  | 6,423,772 | 
|                           |  |  |           | 
|                           |  |  | 8,473,284 | 
|                           |  |  |           | 

12.     COMMITMENTS AND CONTINGENCIES

Tanox has been engaged in litigation in connection with a fee dispute with
the law firms that represented Tanox in a lawsuit with Genentech relating to,
among other things, the intellectual property rights surrounding the
development of anti-IgE technology. An arbitration panel issued an award in
1999 entitling the attorneys to receive (i) approximately $3.5 million,
including interest, (ii) payments ranging from 33-1/3% to 40% of the future
milestone payments, in excess of the first $1 million, that Tanox may receive
from Genentech following product approval and (iii) 10% of the royalties that
Tanox may receive

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Tanox, Inc. and Subsidiaries
Note to Consolidated Financial Statements  (Continued)

on sales of certain anti-IgE products, including Xolair. Tanox sought a
court order vacating this arbitration award, but a judgment was entered
confirming the award, and that judgment was confirmed by the Court of Appeals,
14th District of Texas. On October 31, 2003, the Texas Supreme Court denied
our petition for review. During the appeals process, Tanox has been required
to post a bond or place amounts in escrow to secure payment of the award. The
Company had deposited $9.7 million in escrow with the District Court at
December 31, 2003 in replacement of a bond and standby letter of credit which
were released in July 2003.

At December 31, 2003, Tanox was engaged in various legal disputes with
Novartis and Genentech over matters relating to their collaborative agreements.
(See Note 15. Subsequent Events.)

From time to time Tanox is a defendant in other lawsuits incidental to its
business. Management believes that the outcome of these lawsuits will not be
material to Tanoxs financial statements.

401(k) Plan

Effective January 1, 1992, Tanox adopted a qualified retirement plan (the
401(k) Plan) covering all of Tanoxs U.S. employees who are at least 21 years
of age and have completed at least 90 days of service with Tanox. Pursuant to
the 401(k) Plan, employees may elect to reduce their current compensation by up
to the statutorily prescribed annual limit and have the amount of such
reduction contributed to the 401(k) Plan. The 401(k) Plan permits, but does
not require, additional matching contributions by Tanox on behalf of all
participants in the 401(k) Plan. Tanoxs matching contributions to the 401(k)
Plan totaled approximately $331,000, $337,000 and $208,000 in 2003, 2002 and
2001, respectively.

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Tanox, Inc. and Subsidiaries
Note to Consolidated Financial Statements  (Continued)

13.     GEOGRAPHIC AREAS:

Tanox operates in a single business segment. Tanoxs operations by
geographic area for the years ended December 31, 2003, 2002 and 2001, are
presented below (in thousands):

|                              |                        |   |          |        |            |   |              |         |   |   |         |         |  
|----------------------------- | ---------------------- | - | -------- | ------ | ---------- | - | ------------ | ------- | - | - | ------- | ------- | -
|                              |                        |   | Total    |        | Net Income |   | Identifiable
|                              |                        |   | Revenues |        | (Loss)     |   | Assets      
|                              |                        |   |          |        |            |   |             
|Year Ended December 31, 2003- |                        |   |          |        |            |   |              |         |   |   |         |        
|                              | Americas               |   | $        | 18,481 |            |   | $            | (4,333  | ) |   | $       | 251,856 |  
|                              | Europe                 |   |          | 6      |            |   |              |        |   |   |         |        |  
|                              | Asia                   |   |          |       |            |   |              | (305    | ) |   |         |        |  
|                              | Interarea eliminations |   |          |       |            |   |              |        |   |   |         |        |  
|                              |                        |   |          |        |            |   |              |         |   |   |         |         |  
|                              |                        | $ | 18,487   |        |            | $ | (4,638       | )       |   | $ | 251,856 |        
|                              |                        |   |          |        |            |   |              |         |   |   |         |        
|Year Ended December 31, 2002- |                        |   |          |        |            |   |              |         |   |   |         |        
|                              | Americas               |   | $        | 560    |            |   | $            | (25,723 | ) |   | $       | 262,134 |  
|                              | Europe                 |   |          |       |            |   |              | (23     | ) |   |         | 553     |  
|                              | Asia                   |   |          |       |            |   |              | (276    | ) |   |         | 672     |  
|                              | Interarea eliminations |   |          |       |            |   |              |        |   |   |         | (12,148 | )
|                              |                        |   |          |        |            |   |              |         |   |   |         |         |  
|                              |                        | $ | 560      |        |            | $ | (26,022      | )       |   | $ | 251,211 |        
|                              |                        |   |          |        |            |   |              |         |   |   |         |        
|Year Ended December 31, 2001- |                        |   |          |        |            |   |              |         |   |   |         |        
|                              | Americas               |   | $        | 235    |            |   | $            | (16,409 | ) |   | $       | 288,259 |  
|                              | Europe                 |   |          | 184    |            |   |              | (4,670  | ) |   |         | 636     |  
|                              | Asia                   |   |          |       |            |   |              | (298    | ) |   |         | 788     |  
|                              | Interarea eliminations |   |          |       |            |   |              |        |   |   |         | (12,149 | )
|                              |                        |   |          |        |            |   |              |         |   |   |         |         |  
|                              |                        | $ | 419      |        |            | $ | (21,377      | )       |   | $ | 277,534 |        
|                              |                        |   |          |        |            |   |              |         |   |   |         |        

14.     QUARTERLY FINANCIAL DATA (Unaudited) (in thousands except per share data):

|                              |         |          |                    |         |   |              |        |             |  |   |        |       |   |   |        |       |  
|----------------------------- | ------- | -------- | ------------------ | ------- | - | ------------ | ------ | ----------- |  | - | ------ | ----- | - | - | ------ | ----- | -
|                              |         |          | Three Months Ended
|                              |         |          |                   
|2003                          |         | March 31 |                    | June 30 |   | September 30 |        | December 31
|                              |         |          |                    |         |   |              |        |            
|Revenues                      |         | $        | 5                  |         |   | $            | 14,773 |             |  | $ | 899    |       |   | $ | 2,810  |      
|Income (loss) from operations |         |          | (7,812             | )       |   |              | 7,507  |             |  |   | (5,579 | )     |   |   | (4,003 | )    
|Net income (loss)             |         |          | (6,349             | )       |   |              | 8,921  |             |  |   | (4,361 | )     |   |   | (2,849 | )    
|Earnings (loss) per share:    |         |          |                    |         |   |              |        |             |  |   |        |       |   |   |        |      
|                              | Basic   |          |                    | (0.14   | ) |              |        | 0.20        |  |   |        | (0.10 | ) |   |        | (0.07 | )
|                              | Diluted |          |                    | (0.14   | ) |              |        | 0.20        |  |   |        | (0.10 | ) |   |        | (0.07 | )

|                     |                   |          |                    |         |   |              |        |             |   |   |        |       |   |   |        |       |  
|-------------------- | ----------------- | -------- | ------------------ | ------- | - | ------------ | ------ | ----------- | - | - | ------ | ----- | - | - | ------ | ----- | -
|                     |                   |          | Three Months Ended
|                     |                   |          |                   
|2002                 |                   | March 31 |                    | June 30 |   | September 30 |        | December 31
|                     |                   |          |                    |         |   |              |        |            
|Revenues             |                   | $        | 3                  |         |   | $            | 153    |             |   | $ | 253    |       |   | $ | 151    |      
|Loss from operations |                   |          | (7,218             | )       |   |              | (7,490 | )           |   |   | (8,862 | )     |   |   | (8,930 | )    
|Net loss             |                   |          | (5,449             | )       |   |              | (5,591 | )           |   |   | (7,652 | )     |   |   | (7,330 | )    
|Loss per share:      |                   |          |                    |         |   |              |        |             |   |   |        |       |   |   |        |      
|                     | Basic and diluted |          |                    | (0.12   | ) |              |        | (0.13       | ) |   |        | (0.17 | ) |   |        | (0.17 | )

60



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Tanox, Inc. and Subsidiaries
Notes to Consolidated Financial Statements  (Continued)

15.     SUBSEQUENT EVENTS

On February 25, 2004, Tanox, Genentech and Novartis entered into a
three-party collaboration agreement to settle all outstanding litigation and
arbitrations and to finalize the detailed terms of the three-party
collaboration, begun in 1996, to develop and commercialize certain anti-IgE
antibodies, including Xolair and TNX-901. Under the terms of the settlement:
Genentech and Novartis will each reimburse Tanox $3.3 million for a portion of
its TNX-901 development costs; and Tanox will relinquish any rights to
manufacture Xolair and, in exchange, will receive payments tied to the quantity
of Xolair produced.

Tanox and Novartis also entered into an Amended and Restated Development
and Licensing Agreement. Under this agreement, Novartis has agreed to forgive the Companys
note payable of $10.0 million and related accrued interest of $693,000 for the
construction of its pilot manufacturing plant.

61



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ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

On May 17, 2002, the board of directors of Tanox, upon the recommendation
of its Audit Committee, approved the dismissal of Arthur Andersen LLP
(Andersen) as our independent auditors. The Board appointed Ernst & Young LLP
as independent auditors for 2002 on June 24, 2002.

Andersens reports on the Companys consolidated financial statements for
the year ended December 31, 2001 did not contain an adverse opinion or
disclaimer of opinion, nor was it qualified or modified as to uncertainty,
audit scope or accounting principles.

During the year ended December 31, 2001 and through May 17, 2002 (the
Relevant Period), there were no disagreements with Andersen on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure which, if not resolved to Andersens satisfaction, would
have caused them to make reference to the subject matter in connection with
their report on the Companys consolidated financial statements for such years;
and there were no reportable events, as listed in Item 304(a)(1)(v) of
Regulation S-K. We provided Andersen with a copy of the foregoing disclosures.
Attached as Exhibit 16 to our Current Report on Form 8-K filed with the SEC on
May 23, 2002, is a copy of Andersens letter, dated May 23, 2002, stating its
agreement with those statements.

During the Relevant Period, neither we nor anyone acting on our behalf
consulted with Ernst & Young LLP regarding (i) the application of accounting
principles to a specified transaction, either completed or proposed, or the
type of audit opinion that might be rendered on our consolidated financial
statement, or (ii) any matters or reportable events as set forth in Items
304(a)(1)(iv) and (v), respectively, of Regulation S-K.




ITEM 9A. Controls and Procedures

Tanoxs Chief Executive Officer and Vice President of Finance have
concluded that Tanoxs disclosure controls and procedures (as defined in
Securities Exchange Act of 1934 (the Exchange Act) Rules 13a-15(e) and
15d-15(e) are sufficiently effective to ensure that the information required to
be disclosed by Tanox in the reports it files under the Exchange Act is
gathered, analyzed and disclosed with adequate timeliness, accuracy and
completeness, based on an evaluation of such controls and procedures conducted
as of the end of the period covered by this report.

There were no changes in Tanoxs internal control over financial reporting
that occurred during Tanoxs most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, Tanoxs internal
control over financial reporting.

62



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##### Table of Contents






PART III




ITEM 10. Directors and Executive Officers of the Registrant

The information regarding directors that is required by this item is
incorporated by reference from the discussion in the Proxy Statement captioned
Proposal 1  Election of Directors and Beneficial Ownership Table.
Information concerning our executive officers is set forth under Part I of this
Form 10-K.




ITEM 11. Executive Compensation

The information that is required by this item is incorporated by reference
from the discussion in the Proxy Statement captioned Executive Compensation.




ITEM 12. Security Ownership of Certain Beneficial Owners and Management

The information that is required by this item is incorporated by reference
from the discussion in the Proxy Statement captioned Beneficial Ownership
Table.




ITEM 13. Certain Relationships and Related Transactions

The information that is required by this item is incorporated by reference
from the discussion in the Proxy Statement captioned Other Transactions.




ITEM 14. Principal Accounting Fees and Services

The information that is required by this item is incorporated by reference
from the discussion in the Proxy Statement captioned Principal Accounting Fees
and Services.

63



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##### Table of Contents






PART IV




ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K



| | (a) |  | 1. Index to Financial Statements.
| | --- |  | ---------------------------------

|                                                                                                                                                                              
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Report of Independent Auditors                                                                                                                                                
|Report of Independent Public Accountants                                                                                                                                      
|Consolidated
Balance Sheets as of December 31, 2003 and 2002
Consolidated Statements of Operations and Comprehensive Loss for the years
ended
December 31, 2003, 2002 and 2001
|Consolidated Statements of Stockholders Equity for the years ended
December 31, 2003,
2002 and 2001                                                                          
|Consolidated Statements of Cash Flows for the years ended December 31,
2003, 2002 and
2001                                                                                    
|Notes to Consolidated Financial Statements                                                                                                                                    



| | 2. |  | Financial Statement Schedules.
| | -- |  | ------------------------------



| |                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | All schedules are omitted because they are not applicable or not
required, or because the required information is included in the
consolidated financial statements or notes thereto.



| | 3. |  | Exhibits.
| | -- |  | ---------

|        |  |   |  |                                                                                                                                                                                                                                
|------- |  | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3(i).1  |  |  |  | Amended and Restated Certificate of Incorporation of the Registrant, as amended. (1)                                                                                                                                           
|        |  |   |  |                                                                                                                                                                                                                                
|3(i).2  |  |  |  | Certificate of Designations of Series A Junior Participating Preferred Stock (5)                                                                                                                                               
|        |  |   |  |                                                                                                                                                                                                                                
|3(ii).1 |  |  |  | Bylaws of the Registrant, as currently in effect. (7)                                                                                                                                                                          
|        |  |   |  |                                                                                                                                                                                                                                
|4.1     |  |  |  | Specimen of Common Stock Certificate, $.01 par value, of the Registrant. (1)                                                                                                                                                   
|        |  |   |  |                                                                                                                                                                                                                                
|10.1    |  |  |  | Form of Indemnification Agreement between the Registrant and its officers and directors.
(1) (8)                                                                                                                               
|        |  |   |  |                                                                                                                                                                                                                                
|10.2    |  |  |  | 1987 Stock Option Plan of the Registrant, as amended. (1) (8)                                                                                                                                                                  
|        |  |   |  |                                                                                                                                                                                                                                
|10.3    |  |  |  | 1992 Non-employee Directors Stock Option Plan of the Registrant. (1) (8)                                                                                                                                                       
|        |  |   |  |                                                                                                                                                                                                                                
|10.4    |  |  |  | 1997 Stock Plan of the Registrant. (1) (8)                                                                                                                                                                                     
|        |  |   |  |                                                                                                                                                                                                                                
|10.5    |  |  |  | Stock Purchase Agreement, dated July 14, 1987, by and among the Registrant and Tse Wen
Chang, Nancy T. Chang, Alafi Capital Company, Shireen Alafi, Joseph Heskel, Trustee for
Christopher Alafi, and Invitron Corporation. (1)
|        |  |   |  |                                                                                                                                                                                                                                
|10.6    |  |  |  | License for Winter Patent, dated June 26, 1989, by and between Medical Research Council
and the Registrant. (1)                                                                                                                
|        |  |   |  |                                                                                                                                                                                                                                
|10.7    |  |  |  | Amendment to the License for Winter Patent, dated February 9, 1990, by and between Medical
Research Council and the Registrant. (1)                                                                                            
|        |  |   |  |                                                                                                                                                                                                                                
|10.8    |  |  |  | Development and Licensing Agreement, dated May 11, 1990, by and between the Registrant and
Ciba-Geigy Limited. (1)                                                                                                             
|        |  |   |  |                                                                                                                                                                                                                                
|10.9    |  |  |  | Term Sheet for Secured Loan, dated December 14, 1994, by and between the Registrant and
Ciba-Geigy Limited. (1)                                                                                                                
|        |  |   |  |                                                                                                                                                                                                                                
|10.10   |  |  |  | License Agreement, dated June 1, 1998, by and between Biogen, Inc. and the Registrant. (1)                                                                                                                                     
|        |  |   |  |                                                                                                                                                                                                                                
|10.11   |  |  |  | Outline of Terms for Settlement of the Litigations Among Genentech, Inc., Genentech
International, Ltd., the Registrant and Ciba-Geigy Limited Relating to Anti-IgE Inhibiting
Monoclonal Antibodies, dated July 8, 1996. (1)  

64



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##### Table of Contents



|      |  |   |  |                                                                                                                                                                                                                                                             
|----- |  | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.12 |  |  |  | Supplemental Agreement between the Registrant and Ciba-Geigy Limited, dated July 8, 1996.
(1)                                                                                                                                                               
|      |  |   |  |                                                                                                                                                                                                                                                             
|10.13 |  |  |  | Settlement and Cross-Licensing Agreement, dated July 8, 1996, by and between the
Registrant and Genentech, Inc. and Genentech International Limited. (1)                                                                                                    
|      |  |   |  |                                                                                                                                                                                                                                                             
|10.14 |  |  |  | Settlement and Participation Agreement, dated July 8, 1996, by and between the Registrant
and F. Hoffman-La Roche, Ltd., Hoffman-La Roche, Inc., Roche Holding Ltd. and Roche
Holdings, Inc. (1)                                                            
|      |  |   |  |                                                                                                                                                                                                                                                             
|10.15 |  |  |  | 2000 Non-Employee Directors Stock Option Plan. (1) (8)                                                                                                                                                                                                     
|      |  |   |  |                                                                                                                                                                                                                                                             
|10.16 |  |  |  | Master Agreement, dated March 17, 2000, by and between the Registrant and Protein Design
Labs, Inc. (1)                                                                                                                                                     
|      |  |   |  |                                                                                                                                                                                                                                                             
|10.17 |  |  |  | First Amendment to the Tanox, Inc. 1997 Stock Plan. (2) (8)                                                                                                                                                                                                 
|      |  |   |  |                                                                                                                                                                                                                                                             
|10.18 |  |  |  | First Amendment to the 2000 Non-Employee Directors Stock Option Plan (3)(8)                                                                                                                                                                                
|      |  |   |  |                                                                                                                                                                                                                                                             
|10.19 |  |  |  | Rights Agreement dated as of July 27, 2001 between Tanox, Inc. and American Stock Transfer
& Trust Company, as Rights Agent, which includes as Exhibit A the form of Rights
Certificate and as Exhibit B the Summary of Rights to Purchase Common Stock. (4)
|      |  |   |  |                                                                                                                                                                                                                                                             
|10.20 |  |  |  | Credit Agreement dated September 27, 2002, by and between Wells Fargo Bank Texas, National
Association and the Registrant. (6)                                                                                                                              
|      |  |   |  |                                                                                                                                                                                                                                                             
|21.1  |  |  |  | List of Subsidiaries of the Registrant.                                                                                                                                                                                                                     
|      |  |   |  |                                                                                                                                                                                                                                                             
|23.1  |  |  |  | Consent of Independent Auditors                                                                                                                                                                                                                             
|      |  |   |  |                                                                                                                                                                                                                                                             
|23.2  |  |  |  | Information regarding consent of Arthur Andersen LLP                                                                                                                                                                                                        
|      |  |   |  |                                                                                                                                                                                                                                                             
|31.1  |  |  |  | Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                             
|      |  |   |  |                                                                                                                                                                                                                                                             
|31.2  |  |  |  | Certification of Vice President of Finance Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.                                                                                                                                                       
|      |  |   |  |                                                                                                                                                                                                                                                             
|32    |  |  |  | Certification of CEO and Vice President of Finance Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.                                                                                                                                               



---

|(1) |  | Filed as an exhibit to our Registration Statement on
Form S-1 (no. 333-90625) and incorporated herein by reference.                     
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Filed as an exhibit to our Quarterly Report on Form
10-Q for the quarter ended September 30, 2000, and incorporated
herein by reference.
|   
|(3) |  | Filed as an exhibit to our Quarterly Report on Form
10-Q for the quarter ended June 30, 2001, and incorporated
herein by reference.     
|   
|(4) |  | Filed as an exhibit to our Current Report on Form 8-K
dated August 2, 2001.                                                             
|   
|(5) |  | Filed as an exhibit to our Quarterly Report on Form
10-Q for the quarter ended June 30, 2002, and incorporated
herein by reference.     
|   
|(6) |  | Filed as an exhibit to our Quarterly Report on Form
10-Q for the quarter ended September 30, 2002, and incorporated
herein by reference.
|   
|(7) |  | Filed as an exhibit to our Current Report on Form 8-K
dated November 20, 2003.                                                          
|   
|(8) |  | Management contract or compensatory plan.                                                                                               



| | (b) |  | Reports on Form 8-K
| | --- |  | -------------------



| |                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Current Report on Form 8-K dated November 20, 2003, filed pursuant to
Item 5 of the report and containing a copy of the Companys press release
entitles Tanox Reports Third Quarter 2003 Financial Results.

65



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

| |  |     |  |                                      
| |  | --- |  | -------------------------------------
| |  |     |  | TANOX, INC                           
| |  |     |  |                                      
| |  | By: |  | /s/ Nancy T. Chang                   
| |  |     | 
| |  |     |  | Nancy T. Chang                       
| |  |     |  | President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act, this report
has been signed by the following persons on behalf of the registrant in the
capacities and on the dates indicated:

|                                          |  |                                                                        |  |               
|----------------------------------------- |  | ---------------------------------------------------------------------- |  | --------------
|Signature                                 |  | Title                                                                  |  | Date          
|                                          |  |                                                                        |  |               
|/s/ Nancy T. Chang
Nancy T. Chang         |  | President, Chief Executive Officer                                     |  | March 15, 2004
|                                          |  |                                                                        |  |               
|/s/ Gregory P. Guidroz
Gregory P. Guidroz |  | Vice President of Finance
(Principal Financial and Accounting Officer) |  | March 15, 2004
|                                          |  |                                                                        |  |               
|/s/ Osama Mikhail
Osama Mikhail           |  | Chairman of the Board                                                  |  | March 15, 2004
|                                          |  |                                                                        |  |               
|/s/ Tse Wen Chang
Tse Wen Chang           |  | Director                                                               |  | March 15, 2004
|                                          |  |                                                                        |  |               
|/s/ William J. Jenkins
William J. Jenkins |  | Director                                                               |  | March 15, 2004
|                                          |  |                                                                        |  |               
|/s/ Heinz W. Bull                         |  | Director                                                               |  | March 15, 2004
|Heinz W. Bull                             |  |                                                                        |  |               

66



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##### Table of Contents






Index to Exhibits

|            |  |   |  |                                                                                                                                                                                                                                
|----------- |  | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibits No |  |   |  | Description                                                                                                                                                                                                                    
|            |  |   |  |                                                                                                                                                                                                                                
|3(i).1      |  |  |  | Amended and Restated Certificate of Incorporation of the Registrant, as amended. (1)                                                                                                                                           
|            |  |   |  |                                                                                                                                                                                                                                
|3(i).2      |  |  |  | Certificate of Designations of Series A Junior Participating Preferred Stock (5)                                                                                                                                               
|            |  |   |  |                                                                                                                                                                                                                                
|3(ii).1     |  |  |  | Bylaws of the Registrant, as currently in effect. (7)                                                                                                                                                                          
|            |  |   |  |                                                                                                                                                                                                                                
|4.1         |  |  |  | Specimen of Common Stock Certificate, $.01 par value, of the Registrant. (1)                                                                                                                                                   
|            |  |   |  |                                                                                                                                                                                                                                
|10.1        |  |  |  | Form of Indemnification Agreement between the Registrant and its officers and directors.
(1) (8)                                                                                                                               
|            |  |   |  |                                                                                                                                                                                                                                
|10.2        |  |  |  | 1987 Stock Option Plan of the Registrant, as amended. (1) (8)                                                                                                                                                                  
|            |  |   |  |                                                                                                                                                                                                                                
|10.3        |  |  |  | 1992 Non-employee Directors Stock Option Plan of the Registrant. (1) (8)                                                                                                                                                       
|            |  |   |  |                                                                                                                                                                                                                                
|10.4        |  |  |  | 1997 Stock Plan of the Registrant. (1) (8)                                                                                                                                                                                     
|            |  |   |  |                                                                                                                                                                                                                                
|10.5        |  |  |  | Stock Purchase Agreement, dated July 14, 1987, by and among the Registrant and Tse Wen
Chang, Nancy T. Chang, Alafi Capital Company, Shireen Alafi, Joseph Heskel, Trustee for
Christopher Alafi, and Invitron Corporation. (1)
|            |  |   |  |                                                                                                                                                                                                                                
|10.6        |  |  |  | License for Winter Patent, dated June 26, 1989, by and between Medical Research Council
and the Registrant. (1)                                                                                                                
|            |  |   |  |                                                                                                                                                                                                                                
|10.7        |  |  |  | Amendment to the License for Winter Patent, dated February 9, 1990, by and between Medical
Research Council and the Registrant. (1)                                                                                            
|            |  |   |  |                                                                                                                                                                                                                                
|10.8        |  |  |  | Development and Licensing Agreement, dated May 11, 1990, by and between the Registrant and
Ciba-Geigy Limited. (1)                                                                                                             
|            |  |   |  |                                                                                                                                                                                                                                
|10.9        |  |  |  | Term Sheet for Secured Loan, dated December 14, 1994, by and between the Registrant and
Ciba-Geigy Limited. (1)                                                                                                                
|            |  |   |  |                                                                                                                                                                                                                                
|10.10       |  |  |  | License Agreement, dated June 1, 1998, by and between Biogen, Inc. and the Registrant. (1)                                                                                                                                     
|            |  |   |  |                                                                                                                                                                                                                                
|10.11       |  |  |  | Outline of Terms for Settlement of the Litigations Among Genentech, Inc., Genentech
International, Ltd., the Registrant and Ciba-Geigy Limited Relating to Anti-IgE Inhibiting
Monoclonal Antibodies, dated July 8, 1996. (1)  





---



##### Table of Contents



|         |  |   |  |                                                                                                                                                                                                                                                             
|-------- |  | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibits |  |   |  | Description                                                                                                                                                                                                                                                 
|         |  |   |  |                                                                                                                                                                                                                                                             
|10.12    |  |  |  | Supplemental Agreement between the Registrant and Ciba-Geigy Limited, dated July 8, 1996.
(1)                                                                                                                                                               
|         |  |   |  |                                                                                                                                                                                                                                                             
|10.13    |  |  |  | Settlement and Cross-Licensing Agreement, dated July 8, 1996, by and between the
Registrant and Genentech, Inc. and Genentech International Limited. (1)                                                                                                    
|         |  |   |  |                                                                                                                                                                                                                                                             
|10.14    |  |  |  | Settlement and Participation Agreement, dated July 8, 1996, by and between the Registrant
and F. Hoffman-La Roche, Ltd., Hoffman-La Roche, Inc., Roche Holding Ltd. and Roche
Holdings, Inc. (1)                                                            
|         |  |   |  |                                                                                                                                                                                                                                                             
|10.15    |  |  |  | 2000 Non-Employee Directors Stock Option Plan. (1) (8)                                                                                                                                                                                                     
|         |  |   |  |                                                                                                                                                                                                                                                             
|10.16    |  |  |  | Master Agreement, dated March 17, 2000, by and between the Registrant and Protein Design
Labs, Inc. (1)                                                                                                                                                     
|         |  |   |  |                                                                                                                                                                                                                                                             
|10.17    |  |  |  | First Amendment to the Tanox, Inc. 1997 Stock Plan. (2) (8)                                                                                                                                                                                                 
|         |  |   |  |                                                                                                                                                                                                                                                             
|10.18    |  |  |  | First Amendment to the 2000 Non-Employee Directors Stock Option Plan (3)(8)                                                                                                                                                                                
|         |  |   |  |                                                                                                                                                                                                                                                             
|10.19    |  |  |  | Rights Agreement dated as of July 27, 2001 between Tanox, Inc. and American Stock Transfer
& Trust Company, as Rights Agent, which includes as Exhibit A the form of Rights
Certificate and as Exhibit B the Summary of Rights to Purchase Common Stock. (4)
|         |  |   |  |                                                                                                                                                                                                                                                             
|10.20    |  |  |  | Credit Agreement dated September 27, 2002, by and between Wells Fargo Bank Texas, National
Association and the Registrant. (6)                                                                                                                              
|         |  |   |  |                                                                                                                                                                                                                                                             
|21.1     |  |  |  | List of Subsidiaries of the Registrant.                                                                                                                                                                                                                     
|         |  |   |  |                                                                                                                                                                                                                                                             
|23.1     |  |  |  | Consent of Independent Auditors                                                                                                                                                                                                                             
|         |  |   |  |                                                                                                                                                                                                                                                             
|23.2     |  |  |  | Information regarding consent of Arthur Andersen LLP                                                                                                                                                                                                        
|         |  |   |  |                                                                                                                                                                                                                                                             
|31.1     |  |  |  | Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                             
|         |  |   |  |                                                                                                                                                                                                                                                             
|31.2     |  |  |  | Certification of Vice President of Finance Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.                                                                                                                                                       
|         |  |   |  |                                                                                                                                                                                                                                                             
|32       |  |  |  | Certification of CEO and Vice President of Finance Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.                                                                                                                                               



---

|(1) |  | Filed as an exhibit to our Registration Statement on
Form S-1 (no. 333-90625) and incorporated herein by reference.                     
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Filed as an exhibit to our Quarterly Report on Form
10-Q for the quarter ended September 30, 2000, and incorporated
herein by reference.
|   
|(3) |  | Filed as an exhibit to our Quarterly Report on Form
10-Q for the quarter ended June 30, 2001, and incorporated
herein by reference.     
|   
|(4) |  | Filed as an exhibit to our Current Report on Form 8-K
dated August 2, 2001.                                                             
|   
|(5) |  | Filed as an exhibit to our Quarterly Report on Form
10-Q for the quarter ended June 30, 2002, and incorporated
herein by reference.     
|   
|(6) |  | Filed as an exhibit to our Quarterly Report on Form
10-Q for the quarter ended September 30, 2002, and incorporated
herein by reference.
|   
|(7) |  | Filed as an exhibit to our Current Report on Form 8-K
dated November 20, 2003.                                                          
|   
|(8) |  | Management contract or compensatory plan.