<PAGE>   1

                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                   FORM 10-Q


(Mark One)

      [X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
               SECURITIES EXCHANGE ACT OF 1934 FOR QUARTER ENDED MARCH 31, 1997

                                       OR

      [ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
               SECURITIES EXCHANGE ACT OF 1934

Commission File Number:  1-12574

                        TEXAS BIOTECHNOLOGY CORPORATION
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

         Delaware                                       13-3532643
--------------------------------------------------------------------------------
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)


         7000 Fannin, Suite 1920, Houston, Texas            77030
--------------------------------------------------------------------------------
         (Address of principal executive office)         (Zip code)

                                 (713) 796-8822
--------------------------------------------------------------------------------
              (Registrant's telephone number, including area code)

                                 Not Applicable
--------------------------------------------------------------------------------
       (Former name, former address and former fiscal year, if changed
                             since last report)

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

Yes   X    No  
     ---       ---

Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.

<TABLE>

            Class                                  Outstanding at March 31, 1997
            -----                                  -----------------------------
    <S>                                                      <C>
    Common Stock, $0.005 par value                           25,625,965
</TABLE>
<PAGE>   2
                        TEXAS BIOTECHNOLOGY CORPORATION

                               TABLE OF CONTENTS





<TABLE>
<CAPTION>
                                                                                             PAGE NO.
                                                                                             --------
<S>                                                                                         <C>
PART I.    FINANCIAL INFORMATION

           ITEM 1:  FINANCIAL STATEMENTS

           Consolidated Balance Sheets as of March 31, 1997 and December 31, 1996                1

           Consolidated Statements of Operations for the three months ended
           March 31, 1997 and 1996 and the period from August 2, 1989 (date of
           incorporation) through March 31, 1997                                                 2

           Consolidated Statements of Cash Flows the three months ended March
           31, 1997 and 1996, and the period from August 2, 1989 (date of
           incorporation) through March 31, 1997                                                 3

           Notes to Consolidated Financial Statements                                            4

           ITEM 2:  MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                    FINANCIAL CONDITION AND RESULTS OF OPERATIONS                               13



PART II.   OTHER INFORMATION
                                                                                                
           ITEM 1:  Legal Proceedings                                                           17

           ITEM 2:  Changes in Securities                                                       17

           ITEM 3:  Defaults Upon Senior Securities                                             18

           ITEM 4:  Submission of Matters to a Vote of Security Holders                         18

           ITEM 5:  Other Information                                                           18

           ITEM 6:  Exhibits and Reports on Form 8-K                                            18



SIGNATURES                                                                                      19


INDEX TO EXHIBITS                                                                               20

</TABLE>

<PAGE>   3
                 TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
                        (A DEVELOPMENT STAGE ENTERPRISE)

                          CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                             MARCH 31,      DECEMBER 31,
                                  ASSETS                                      1997             1996
                                 -------                                   ------------    -------------
                                                                           (Unaudited)
<S>                                                                        <C>                <C>      
Current assets:
       Cash and cash equivalents                                           $  3,592,436       2,127,999
       Short term investments                                                10,650,745      11,262,292
       Short term note receivable                                               122,500         122,500
       Prepaids                                                                 470,718         546,752
       Inventory                                                                167,560              --
       Other current assets                                                     810,915         602,975
                                                                           ------------    ------------
            Total current assets                                             15,814,874      14,662,518

Equipment and leasehold improvements, at cost less
       accumulated depreciation and amortization (note 5)                     3,486,568       3,458,012

Other assets                                                                     59,591          59,591
                                                                           ------------    ------------

           Total assets                                                    $ 19,361,033      18,180,121
                                                                           ============    ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY
                      ------------------------------------

Current liabilities:
       Accounts payable                                                    $  2,593,964       1,661,339
       Accrued expenses                                                         409,577       2,266,376
       Deferred revenue (note 8)                                                437,500         625,000
                                                                           ------------    ------------
           Total current liabilities                                          3,441,041       4,552,715

Commitments and contingencies (notes 6, 8, 9 and 11)

Stockholders' equity (notes 2, 3 and 6):
       Preferred stock, par value $.005 per share.  At March 31, 1997
           5,000,000 shares authorized; 6,000 shares of 5% cumulative
           convertible issued and outstanding.  At December 31, 1996,
           5,000,000 shares authorized, none outstanding                             30              --
       Common stock, par value $.005 per share.  At March 31, 1997,
           75,000,000 shares authorized; 25,625,965 shares issued and
           outstanding.  At December 31, 1996, 25,490,269 shares
           issued and outstanding                                               128,129         127,451
       Additional paid-in capital                                            84,502,555      77,808,331
       Deficit accumulated during the development stage                     (68,710,722)    (64,308,376)
                                                                           ------------    ------------
           Total stockholders' equity                                        15,919,992      13,627,406
                                                                           ------------    ------------

           Total liabilities and stockholders' equity                      $ 19,361,033      18,180,121
                                                                           ============    ============

</TABLE>
          See accompanying notes to consolidated financial statements




FORM 10-Q                                                                 Page 1
<PAGE>   4
                TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
                       (A DEVELOPMENT STAGE ENTERPRISE)
                                      
                    CONSOLIDATED STATEMENTS OF OPERATIONS
                                      
                                 (UNAUDITED)
 


<TABLE>
<CAPTION>
                                                                                   AUGUST 2, 1989
                                                                                      (DATE OF
                                                                                   INCORPORATION)
                                                             THREE MONTHS ENDED          TO
                                                                 MARCH 31,            MARCH 31,
                                                            1997          1996          1997
                                                        ------------ ------------  --------------
<S>                                                     <C>             <C>          <C>       

Revenues:
         Research agreements (note 8)                   $   797,501     1,915,110    17,231,297
         Products and services                                2,499         1,439       408,079
         Grant revenue                                           --           753       668,951
                                                        -----------   -----------   -----------
                Total revenues                              800,000     1,917,302    18,308,327
                                                        -----------   -----------   -----------

Expenses:
         Research and development                         4,285,054     5,480,616    60,124,604
         Charge for purchase of in-process research
            and development (notes 9 and 10)                     --            --     9,465,610
         General and administrative                       1,084,298     1,112,492    20,556,437
         Restructuring & Impairment charges (note 10)            --       421,165     1,064,915
                                                        -----------   -----------   -----------
                Total expenses                            5,369,352     7,014,273    91,211,566
                                                        -----------   -----------   -----------

                Operating loss                            4,569,352     5,096,971    72,903,239
                                                        -----------   -----------   -----------
Other income (expense):
         Interest income                                    157,388       245,888     4,274,546
         Interest expense                                        --            --       (91,647)
         Other                                                9,618            --         9,618
                                                        -----------   -----------   -----------
                Total other income (expense)                167,006       245,888     4,192,517

                Net loss                                $ 4,402,346     4,851,083    68,710,722
                Preferred dividend requirement              396,952            --       396,952

                Net loss applicable to common shares    $ 4,799,298     4,851,083    69,107,674

Net loss per share                                      $      0.19          0.24          6.31
                                                        ===========   ===========   ===========
Weighted average common shares used to compute
         net loss per share                              25,516,729    20,617,041    10,954,303
                                                        ===========   ===========   ===========
</TABLE>
          See accompanying notes to consolidated financial statements




FORM 10-Q                                                                 Page 2
<PAGE>   5


                 TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
                        (A DEVELOPMENT STAGE ENTERPRISE)

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                 FOR THE PERIODS ENDED MARCH 31, 1997 AND 1996,
  AND THE PERIOD FROM AUGUST 2, 1989 (DATE OF INCORPORATION) TO MARCH 31, 1997


<TABLE>
<CAPTION>
                                                                                               AUGUST 2, 1989
                                                                                                  (DATE OF
                                                                                               INCORPORATION)
                                                                       THREE MONTHS ENDED            TO
                                                                            MARCH 31,,            MARCH 31,
                                                                      1997           1996           1997
                                                                   -----------    -----------    -----------
<S>                                                                <C>             <C>            <C>         

CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss                                                        $(4,402,346)    (4,851,083)   (68,710,722)
   Adjustments to reconcile net loss to net cash
    used in operating activities:
          Write-off of deferred offering costs related
                to delayed offering                                         --             --        349,078
          Depreciation and amortization                                186,365        185,035      4,798,532
          Interest expense converted on notes payable                       --             --         87,755
          Non cash acquisition costs expensed (notes 9 and 10)              --             --      9,465,610
          Expenses paid with stock                                          --             --         24,500
          Compensation expense related to stock options (note 3)       153,265         21,886        440,423
          Loss on disposition of fixed assets                               --             --          7,056
          Impairment of intangible assets                                   --             --        643,750
   Change in operating assets and liabilities, net of
      effect of acquisition:
    (Increase) decrease in prepaids                                     76,034        (47,906)      (293,060)
    (Increase) decrease in receivables                                      --         21,099        (90,286)
    (Increase) decrease in other current assets                       (207,940)        95,896       (918,807)
    (Increase) in other assets                                              --             --        (33,594)
    (Increase) in inventories                                         (167,560)            --       (106,315)
    Increase (decrease) in current liabilities                        (924,174)       169,343      2,937,425
    (Decrease) in deferred revenue                                    (187,500)      (400,110)    (1,234,622)
                                                                   -----------    -----------    -----------
          Net cash used in operating activities                     (5,473,856)    (4,805,840)   (52,633,277)
                                                                   -----------    -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchases of equipment and leasehold improvements                  (214,921)       (35,677)    (7,930,841)
   Proceeds from disposition of fixed assets                                --             --         27,400
   Purchase of short term investments                               (5,483,103)   (13,568,320)   (88,580,714)
   Maturity of short term investments                                6,094,650      8,195,307     77,929,969
   Acquisition of subsidiary, net of cash acquired                          --             --       (167,331)
                                                                   -----------    -----------    -----------
         Net cash provided by (used in) investing activities           396,626     (5,408,690)   (18,721,517)
                                                                   -----------    -----------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from notes payable to stockholders and
    related trusts                                                          --             --      1,852,500
   Proceeds from sale of common stock and options and
    warrant exercises, net                                             586,092     13,011,696     67,491,983
   Proceeds from sale of preferred stock, net                        5,955,575             --      5,955,575
   Repurchase of common stock                                               --             --         (3,750)
   Cost of delayed offering                                                 --             --       (349,078)
                                                                   -----------    -----------    -----------
          Net cash provided by financing activities                  6,541,667     13,011,696     74,947,230
                                                                   -----------    -----------    -----------

    Net increase (decrease) in cash and cash equivalents             1,464,437      2,797,166      3,592,436

Cash and cash equivalents at beginning of period                     2,127,999      5,724,264             --
                                                                   -----------    -----------    -----------

Cash and cash equivalents at end of period                         $ 3,592,436      8,521,430      3,592,436
                                                                   ===========    ===========    ===========

Supplemental schedule of noncash financing activities
   (note 9)                                                        $        --             --     11,405,865
                                                                   ===========    ===========    ===========
</TABLE>
          See accompanying notes to consolidated financial statements




FORM 10-Q                                                                 Page 3
<PAGE>   6

                 TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                MARCH 31, 1997 (UNAUDITED) AND DECEMBER 31, 1996


(1)        ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

      (a)    Organization

             Texas Biotechnology Corporation (the "Company" or "TBC"), a
             biopharmaceutical company, applies innovative drug discovery
             techniques and its specialized knowledge of the role of vascular
             cell biology in cardiovascular disease to the design and
             development of novel pharmaceutical compounds.  The Company was
             incorporated in the state of Delaware in 1989.

             The Company is presently working on a number of long-term
             development projects which involve experimental and unproven
             technology, which may require many years and substantial
             expenditures to complete, and which may be unsuccessful.  To date,
             other than small amounts of monoclonal antibody compounds and
             services produced and sold by ImmunoPharmaceutics, Inc. ("IPI")
             (now discontinued), the Company has not developed or sold any
             products, and no assurance can be given that the Company will be
             able to develop, manufacture or market any products in the future.
             In addition, no assurance exists that future revenues will be
             significant, that any sales will be profitable, or that the
             Company will have sufficient funds available to complete its
             research and development programs or market any products which it
             may develop.  Accordingly, the Company is considered to be in the
             development stage as it has not to date derived significant
             revenues from its planned principal operations.

      (b)    Basis of Consolidation

             The Company's consolidated financial statements include the
             accounts of the Company and its wholly owned subsidiary, IPI.  All
             material intercompany transactions have been eliminated.  The
             Company's consolidated financial statements include the activity
             related to IPI since August 1, 1994.

      (c)    Cash, Cash Equivalents and Short Term Investments

             Cash equivalents are considered to be those securities or
             instruments with original maturities, when purchased, of three
             months or less.  At March 31, 1997, approximately $3,273,000 was
             invested in demand and money market accounts.  Short term
             investments are those investments which have an original maturity
             of less than one year and greater than three months.  At March 31,
             1997, the Company's short term investments consisted of
             approximately $998,000 in U.S. Treasury Bills and $9,653,000 in
             Corporate Commercial Paper.  Cash equivalents and short term
             investments are stated at cost, which approximates market value.
             Interest income is accrued as earned.

      (d)    Equipment and Leasehold Improvements

             Equipment and leasehold improvements are stated at cost less
             accumulated depreciation and amortization.  Depreciation of
             furniture and equipment is provided on the straight-line method
             over the estimated useful lives of the respective assets (3 to 10
             years).  Amortization of leasehold improvements is provided on the
             straight-line method over the remaining minimum lease term.

FORM 10-Q                                                                 Page 4
<PAGE>   7
      (e)    Intangible Assets

             Intangible assets are amortized on a straight line basis over ten
             years.

      (f)    Research and Development Costs

             All research and development costs are expensed as incurred and
             include salaries of research and development employees.  For the
             three months ended March 31, 1997 and 1996 and the period from
             August 2, 1989 (date of incorporation) through March 31, 1997,
             salaries and benefits totaled approximately $1,587,000, $1,928,000
             and $24,873,000, respectively, of which approximately $1,137,000,
             $1,463,000 and $18,083,000, respectively, was charged to research
             and development.  Payments related to the acquisition of
             in-process research and development are expensed.

      (g)    Loss Per Common Share

             Loss per common share is based upon the loss applicable to common
             shares after preferred dividend requirements and upon the weighted
             average of common shares outstanding during the period.  Preferred
             dividend requirements included $13,973 of accrued dividends and,
             pursuant to an SEC Staff Position, deemed dividends attributable
             to the discount factor at issuance of the Preferred Stock of
             $382,979.  For the three months ended March 31, 1997 and 1996 and
             the period from August 2, 1989 (date of incorporation) through
             March 31, 1997, the weighted average common shares used to compute
             net loss per common share totaled 25,516,729, 20,617,041 and
             10,954,303, respectively.  The conversion of securities
             convertible into common stock and the exercise of stock options
             and warrants were not assumed in the calculation of loss per
             common share because the effect would have been antidilutive.
             Shares held in escrow through June 30, 1995, pending satisfaction
             of certain future conditions, and shares related to contingent
             stock issue rights related to the IPI acquisition have been
             excluded from the net loss per share calculation until such shares
             were released or issued.

      (h)    Reclassifications

             Certain reclassifications have been made to prior period financial
             statements to conform with the March 31, 1997 presentation with no
             effect on net loss reported.

      (i)    Revenue Recognition

             Revenue from grants is recognized as earned under the terms of the
             related grant agreements.  Revenue from service contracts is
             recognized as the services are performed and/or as milestones are
             achieved.  Revenue from products and services is recognized when
             the products are shipped or the services are performed.  Amounts
             received in advance of services to be performed under contracts
             are recorded as deferred revenue.

      (j)    Patent Application Costs

             Costs incurred in filing for patents are expensed as incurred.

      (k)    Use of Estimates

             Management of the Company has made a number of estimates and
             assumptions relating to the reporting of assets and liabilities
             and the disclosure of contingent assets and liabilities to prepare
             these consolidated financial statements in conformity with
             generally accepted accounting principles.  Actual results could
             differ from these estimates.





FORM 10-Q                                                                 Page 5
<PAGE>   8


      (l)    Interim Financial Information

             The Consolidated Balance Sheet as of March 31, 1997, and the
             related Consolidated Statements of Operations for the three month
             periods ended March 31, 1997 and 1996, and for the period from
             August 2, 1989 (date of incorporation) through March 31, 1997 and
             Consolidated Statements of Cash Flows for the three month periods
             ended March 31, 1997 and  1996, and from August 2, 1989 (date of
             Incorporation) through March 31, 1997, are unaudited.  In the
             opinion of management, all adjustments necessary for a fair
             presentation of such financial statements have been included.
             Such adjustments consisted of normal recurring items, except as
             stated in note 2 below.  Interim results are not necessarily
             indicative of results for a full year.  The consolidated financial
             statements and notes are presented as permitted by Form 10-Q and
             do not contain certain information included in the Company's
             Annual Consolidated Financial Statements and Notes which should be
             read in conjunction with these consolidated financial statements
             and notes.

(2)   CAPITAL STOCK

      On March 14, 1997, the Company completed a $6.0 million private placement
      of 5% Cumulative Convertible Preferred Stock which provided net proceeds
      to the Company of approximately $5.8 million.  The Preferred Stock is
      convertible into Common Stock at discounts ranging from 6% to 17% from
      the average of the daily low trading price of the Common Stock for the
      ten consecutive trading days immediately preceding the conversion date.
      A total of 6,000 shares of Preferred Stock were sold at a price of $1,000
      per share to two institutional investors.  The Company agreed that it
      will cause to be filed, pursuant to Rule 415 of the Securities Act, an
      S-3 Registration Statement as to the Common Stock into which the
      Preferred Stock is convertible and to gain effectiveness by June 12,
      1997.  The Preferred Stock holds preferential treatment compared to all
      other classes of stock regarding dividend payments and liquidation.
      Dividends have been accrued at the rate of five percent (5%) per annum on
      the amount of Preferred Stock outstanding during the quarter and are
      payable quarterly commencing June 30, 1997 when and as declared by the
      Board of Directors.  In accordance with the Certificate of Designation of
      the Preferred Stock, dividends not declared and paid are considered
      additions to the Preferred Stock amount at the time of conversion and can
      be paid in Common Stock of the Company at time of conversion.  Dividends
      and the discount related to the conversion of the Preferred Stock has
      been shown as a reduction of net loss applicable to common shareholders.
      The liquidation preference (which included accrued dividends) amount of
      Preferred Stock at March 31, 1997 is $6,013,973.  As of March 31, 1997,
      none of  the Preferred Stock has been converted and no dividends have
      been declared or paid.

(3)   STOCK OPTIONS

      The Company has in effect the following stock option plans:

      The Amended and Restated 1990 Incentive Stock Option Plan ("1990 Plan")
      allows for the issuance of incentive and non-qualified options to
      employees, directors, officers, non-employee independent contractors and
      non-employee directors, pursuant to which 230,590 shares of common stock
      are reserved for issuance out of authorized but unissued shares of the
      Company.

      The Amended and Restated 1992 Incentive Stock Option Plan ("1992 Plan")
      allows for the issuance of incentive and non-qualified options to
      employees, directors, officers, non-employee independent contractors and
      non-employee directors, pursuant to which 1,558,173 shares of common
      stock are reserved for issuance out of authorized but unissued shares of
      the Company.

      The Stock Option Plan for Non-Employee Directors ("Director Plan") allows
      for the issuance of non-qualified options to non-employee directors,
      pursuant to which 71,429 shares of common stock are reserved for issuance
      out of authorized but unissued shares of the Company to be issued to
      non-employee members of the Board of Directors of the Company based on a
      formula.





FORM 10-Q                                                                 Page 6
<PAGE>   9
      The Amended and Restated 1995 Stock Option Plan ("1995 Plan") allows for
      the issuance of incentive and non- qualified options, shares of
      restricted stock and stock bonuses to employees, officers, and
      non-employee independent contractors, pursuant to which 2,000,000 shares
      of common stock are reserved for issuance out of authorized but unissued
      shares of the Company.  The Board of Directors amended the 1995 Plan
      effective March 4, 1997 to allow 2,000,000 shares to be reserved for
      issuance which was approved by stockholders at the annual meeting on May
      6, 1997.

      The Amended and Restated 1995 Non-Employee Director Stock Option Plan
      ("1995 Director Plan") allows for the issuance of non-qualified options
      to non-employee directors, pursuant to which 300,000 shares of common
      stock are reserved for issuance out of authorized but unissued shares of
      the Company to be issued to non-employee members of the Board of
      Directors of the Company based on a formula.  In June 1996, the 1995
      Director Plan was amended with respect to the election date requirement
      for a director to request stock in lieu of cash payment of director fees.
      The Board of Directors amended the 1995 Director Plan effective March 4,
      1997 to allow 300,000 shares to be reserved for issuance and also to
      revise the formula for issuing options, both of which were approved by of
      stockholders at the annual meeting on May 6, 1997.

      A summary of stock options as of March 31, 1997, follows:


<TABLE>
<CAPTION>
                     Exercise Price                                                                 Available
 Stock Option Plans     Per Share         Authorized       Outstanding    Exercised    Exercisable   for Grant
 ------------------  --------------       ----------       -----------    ---------    -----------   ---------
<S>                   <C>                  <C>              <C>            <C>          <C>         <C>
1990 Plan             $3.50   $3.56          285,715          173,369       55,125        166,203      57,221
                            -                                                                                
1992 Plan             $1.41 - $5.36        1,700,000        1,300,343      141,827        933,563     257,830

Director Plan         $2.40 - $4.54           71,429           42,576          ---         33,148      28,853

1995 Plan             $1.31 - $5.88        2,000,000        1,185,400          ---        188,176     814,600

1995 Director Plan    $1.38 - $5.19          300,000           82,806          ---         49,422     217,194
                                           ---------        ---------      -------      ---------   ---------
             TOTALS                        4,357,144        2,784,494      196,952      1,370,512   1,375,698
                                           =========        =========      =======      =========   =========
</TABLE>

      As of March 4, 1997, the Board of Directors approved increases in the
      number of shares authorized of 1,000,000 shares in the 1995 Plan and
      100,000 shares in the 1995 Director Plan respectively, which was approved
      by stockholders at the annual meeting on May 6, 1997, which increases are
      included above.

      The Company applies APB Opinion 25 and related interpretations on
      accounting for its plans.  The Company has recorded deferred compensation
      for the difference between the grant price and the deemed fair value for
      financial statement presentation purposes related to certain options
      granted in the period subsequent to May 27, 1993 and prior to the initial
      public offering.  Such amount totaled $287,158, of which $92,765 was
      charged to expense in 1995.  The unamortized deferred compensation
      expense of $46,177 at December 31, 1995 was expensed during 1996.

      During December, 1996, the Compensation and Personnel Committee of the
      Board of Directors authorized the extension of options originally granted
      for a five year period to ten years upon election by individual option
      holders.  In the first quarter of 1997, elections to extend 262,153
      options, originally expiring during 1997, from five to ten years were
      made.  Accordingly, the Company recorded a charge to "deficit accumulated
      during the development stage" of $153,265 as of March 31, 1997, for the
      difference between the original option exercise price and fair market
      value on the effective date of election.  In addition, management
      anticipates offering additional option extensions on the basis noted
      above, and when such elections are made, may result in additional
      compensation expense being recorded.





FORM 10-Q                                                                 Page 7
<PAGE>   10
 (4)  INCOME TAXES

      The Company uses the asset and liability method of accounting for income
      taxes.  Under the asset and liability method of Statement 109, deferred
      tax assets and liabilities are recognized for the future tax consequences
      attributable to differences between the financial statement carrying
      amounts of existing assets and liabilities and their respective tax bases
      and operating loss and tax credit carry forwards.  Deferred tax assets
      and liabilities are measured using enacted tax rates expected to apply to
      taxable income in the years in which those temporary differences are
      expected to be recovered or settled. The effect on deferred tax assets
      and liabilities of a change in tax rates is recognized in income in the
      period that includes the enactment date.

      As of March 31, 1997, the net deferred tax asset totaled approximately
      $23,541,000 and was fully reserved.  The Company did not incur any tax
      expense in any year due to operating losses.

(5)   EQUIPMENT AND LEASEHOLD IMPROVEMENTS

      Equipment and leasehold improvements consist of the following :

<TABLE>
<CAPTION>                                                           
                                                         March 31,1997      December 31,1996    
                                                         -------------      ----------------    
<S>                                                        <C>               <C>                
Laboratory and office equipment                            $ 4,294,649       $ 4,079,728        
Leasehold improvements                                       3,701,771         3,701,772        
                                                           -----------       -----------         
                                                             7,996,420         7,781,500        
Less accumulated depreciation and amortization              (4,509,852)       (4,323,488)        
                                                           -----------       -----------         
                                                           $ 3,486,568       $ 3,458,012        
                                                           ===========       ===========        
</TABLE>                                                                   
                                                                       
(6)   COMMON STOCK RESERVED

      The Company has reserved common stock for issuance as of March 31, 1997
      as follows:

<TABLE>
    <S>                                                  <C>          
    Stock option plans                                     4,160,192
    Agreement with Genentech, Inc.                           285,715
    Warrants issuable under the Genentech Agreement          142,858
    Warrants outstanding                                   5,490,541
    Underwriters purchase options and related warrants       710,000
    IPI acquisition (contingent shares)                    1,000,000   (See note 10)
    Conversion of Preferred Stock                          3,000,000  (See note 2)
                                                          ----------              
         Total shares reserved                            14,789,306
                                                          ==========
</TABLE>

      LG Chem has the option to purchase up to $5 million of common stock on
      one of three exercise dates ending on December 31, 1997.  The minimum
      purchase amount is $1,000,000 and LG Chem and TBC must agree on the
      purchase price or the option cannot be exercised on the given exercise
      date.  As of March 4, 1997, the Board of Directors approved an additional
      1.1 million in Common Stock issuable pursuant to the stock option plans,
      which was approved by stockholders at the annual meeting on May 6, 1997,
      which is included in the reserved shares shown.

(7)   CLINICAL RESEARCH AGREEMENTS

      On June 1, 1995, the Company entered into an agreement with Coromed,
      Inc., to coordinate the clinical evaluation of NOVASTAN(R) as an adjunct
      to t-PA in acute myocardial infarction.  Coromed is responsible for
      managing all aspects of the clinical trial and making all financial
      renumberation to testing sites.  The term of the agreement is 16 months,
      subject to extension upon the mutual written agreement of both parties.
      The term of the contract expired on October 1, 1996, but was extended on
      April 11, 1997 for one year through September 30, 1997 or until all
      services detailed in the original contract are completed.  The parties
      have agreed to a total budget of $961,659.  Of this amount, $44,000 was
      paid upon execution of a letter of intent and $138,566 was paid upon
      execution of the agreement.  Subsequent payments will be made monthly on
      a





FORM 10-Q                                                                 Page 8
<PAGE>   11
      per patient basis, to a maximum total of approximately $734,000.  Three
      additional payments of $15,000 each will be made upon completion of
      specified tasks by Coromed.  If the clinical trial is completed in less
      than 13 months, the Company will pay Coromed a bonus calculated as a
      percentage of personnel costs as set forth in the budget, to a maximum
      bonus amount of approximately $45,000.

 (8)  RESEARCH AGREEMENTS

      On October 11, 1994, the Company signed a collaborative agreement with
      Synthelabo, a French pharmaceutical group, to develop and market
      compounds for vascular proliferative disease derived from the Company's
      research programs.  Upon consummation of the transaction, Synthelabo
      purchased 1,428,571 shares of Common Stock for $3.50 per share for a
      total of $5 million becoming the Company's largest shareholder at that
      time and paid the Company a non- refundable licensing fee of $3 million.
      In addition, Synthelabo committed to pay $3 million annually in research
      payments (payable in quarterly installments of $750,000). Beginning
      October 31, 1996, the parties to the agreement have agreed to revise the
      payment for the third year to be $750,000 which has already been paid.
      No such payments will be made in 1997.  Synthelabo has agreed, upon the
      achievement of certain milestones, to make further payments of up to $3
      million per year for up to $18 million in total.  Synthelabo has the
      right to terminate the agreement any time on or after October 15, 1997
      for any reason and either party has the right to terminate the contract
      for breach of any material obligation.  If Synthelabo exercises this
      termination right, the license granted to Synthelabo will  terminate and
      TBC will pay Synthelabo a royalty on net sales of any products sold in a
      certain territory (Europe, Middle East, Africa and countries of the
      former Soviet Union) for a period of time.  In addition, Synthelabo may,
      at its option, require that the technology be transferred to and the
      development program be conducted by a joint venture owned by TBC and
      Synthelabo should "net worth", as defined in the agreement, be less than
      $5 million as of the end of any calendar quarter during the term of the
      agreement.  For the years ended December 31, 1995 and December 31, 1996,
      TBC received $3 million related to the Synthelabo agreement.  Synthelabo
      will pay royalties to TBC based on the net sales in those areas covered
      in the agreement.  In exchange for the above consideration, Synthelabo
      will receive an exclusive license to manufacture, use, and sell any
      products generated from the research, in Europe, the Middle East, Africa
      and the countries of the former Soviet Union.  The first quarterly
      research payment of $750,000 was received on October 31, 1994, of which
      $500,000 was recognized in 1994.  During the year ended December 31,
      1996, research payments of $3,000,000 were received of which $2,625,000
      was recognized as income during the year. Synthelabo amended the contract
      effective on November 1, 1996 noting that the November 1996 research
      payment of $750,000 would be for research conducted during the period of
      November 1, 1996 through October 31, 1997.  As of March 31, 1997,
      $187,500 has been recognized as revenue and $437,500 is included in
      current deferred revenue.  Synthelabo will pay royalties to TBC, based on
      the net sales, in those geographic areas covered in the agreement.

      During 1995, the Company and Synthelabo mutually agreed to exchange
      certain clinical data.  During 1996, the Company signed two agreements
      with Synthelabo with respect to the supply of information related to
      certain clinical studies.  Over the term of the agreements as certain
      milestones are met, Synthelabo has committed to pay TBC up to $2,920,000.
      These payments are dependent on rate of enrollment in certain clinical
      studies, the completion of certain clinical studies and date of
      completion of certain clinical studies.  As of March 31, 1997, TBC has
      recognized approximately $2.4 million of revenue related to these
      agreements. Synthelabo is the licensee for NOVASTAN(R) in certain
      territories other than those which were sublicensed to TBC.

      On October 10, 1996, the Company signed a strategic alliance agreement
      with LG Chem, a Korean corporation, to develop and market compounds
      derived from the Company's Endothelin Receptor and Selectin Antagonist for
      certain disease indications.  Upon consummation of the transaction, LG
      Chem purchased 1,250,000 shares of common stock for $4.00 per share for a
      total of $5 million.  In addition, LG Chem has committed to pay $10.7
      million in research payments.  Of this amount, $100,000 was paid on
      December 31, 1996, $1.0 million will be paid on each of June 30 and
      December 31 of 1997, 1998, 1999 and 2000, and $1.3 million on June 30     
      and December 31, 2001.  LG Chem has the right to terminate future

        

        

FORM 10-Q                                                                 Page 9
<PAGE>   12
       research payments if TBC fails to meet certain Agreement milestones,
       which milestones will be established by the parties in accordance with
       the agreement.  LG Chem will pay royalties to TBC, based on net sales,
       in those geographic areas covered by the agreement, which include Korea,
       China, India and certain other Asian countries, excluding Japan.  The
       Company will pay its agents in the contract negotiations, a commission
       on all future research payments as well as a royalty on net sales.  As
       of March 31, 1997, the Company has recognized approximately $500,000 in
       revenues and approximately $40,000 in commissions related to these
       payments.

(9)   LICENSE AGREEMENT

      In May 1993, TBC entered into an agreement with Genentech to sublicense
      Genentech's rights and technology relating to NOVASTAN(R) (argatroban)
      originally licensed to Genentech by Mitsubishi Chemical Corporation
      ("Mitsubishi"), and to license Genentech's own proprietary technology
      developed with respect to NOVASTAN(R) (the "Genentech Agreement").  Under
      the license and sublicense, the Company has an exclusive license to use
      and sell NOVASTAN(R) in the United States and Canada for specified human
      cardiovascular indications, not including cerebral thromboembolism
      (stroke).  The Company is required to pay Genentech and Mitsubishi
      specified royalties on net sales of NOVASTAN(R) by the Company and its
      sublicensees after its commercial introduction in the United States and
      Canada.  Genentech has the right to terminate the agreement or to cause
      the license to become non-exclusive if the Company fails to exercise due
      diligence in performing its obligations under the agreement for a period
      of 60 days after receiving written notice from Genentech or fails to
      maintain a minimum consolidated tangible net worth of $5.0 million. The
      Genentech Agreement, as amended, provides that Mitsubishi may terminate
      Genentech's license with Mitsubishi (which results in the termination of
      the Genentech Agreement as well) if TBC does not file an NDA for
      NOVASTAN(R) with the FDA no later than June 30, 1997, subject to certain
      additional goals being met by TBC.  As of March 31, 1997, TBC had not met
      certain of those goals.  However, Mitsubishi has agreed to withhold its
      rights to terminate the license with Genentech if the NDA is filed by
      June 30, 1997, and if TBC accomplishes the following milestones:  (i) on
      or before December 31, 1996, TBC shall have met certain enrollment
      guidelines for certain NOVASTAN(R) clinical trials; (ii) on or before
      March 31, 1997, TBC shall complete, report and analyze certain other
      NOVASTAN(R) clinical trials; (iii) on or before September 30, 1997, TBC
      shall have agreed to proceed with the Phase III trial in AMI, and (iv)
      TBC shall comply with certain reporting and information meeting
      requirements.  If these milestones are not met, Mitsubishi will retain
      the rights to terminate the Genentech license; provided, that if such
      termination results from TBC's violation of the milestone described in
      (iii) above, TBC will receive a license from Mitsubishi in the field of
      HIT/HITTS on the same terms, as presently included in the Genentech
      Agreement.  As of December 31, 1996, TBC had not met certain of these
      goals and to date, Mitsubishi has not asserted its rights to terminate
      the license arising out of this default.  Either party may terminate the
      Genentech Agreement on 60 days notice if the other party defaults in its
      material obligations under the agreement, declares bankruptcy or is
      insolvent, or if a substantial portion of its property is subject to
      attachment.  The Genentech Agreement is also subject to the continuation
      of Genentech's license agreement with Mitsubishi, which is only
      terminable if Genentech defaults in its material obligations under the
      agreement, declares bankruptcy or is insolvent, or if a substantial
      portion of its property is subject to attachment.  Unless terminated
      sooner pursuant to the above described termination provisions, the
      Genentech Agreement is expected to expire in June 2007.  Under the
      Genentech Agreement, TBC has access to an improved formulation patent
      granted in 1993 which expires in 2010 and a use patent which expires in
      2009.

      Mitsubishi further agreed to supply the Company with its requirements of
      NOVASTAN(R) throughout the term of the Genentech Agreement for TBC's
      clinical testing and commercial sales of NOVASTAN(R) in the United States
      and Canada.  In the event Mitsubishi should discontinue the manufacture of
      NOVASTAN(R), Mitsubishi, Genentech and TBC have agreed to discuss in good
      faith the means by which, and the party to whom, NOVASTAN(R) production
      technology will be transferred.  The transferee may be a person or entity
      other than Genentech or TBC.  At present, Mitsubishi is the only
      manufacturer of NOVASTAN(R).  Should Mitsubishi terminate or default in
      its supply commitment, there can be no assurance that alternate sources of
      bulk NOVASTAN(R) will be available to the Company at reasonable cost, if
      at all.  If such alternate sources of
        




FORM 10-Q                                                                Page 10
<PAGE>   13
       supply are unavailable or uneconomic, the Company's results of
       operations would be materially and adversely affected.

       In exchange for the license to Genentech's NOVASTAN(R) technology, TBC
       issued Genentech 285,714 shares of Common Stock and agreed to issue (i)
       an additional 214,286 shares of Common Stock to Genentech within 10 days
       after the filing of the first New Drug Application ("NDA") with the FDA
       for NOVASTAN(R), and (ii) an additional 71,429 shares of Common Stock to
       Genentech within 10 days after the FDA's first approval of an NDA for
       NOVASTAN(R).  The Company has also agreed to grant Genentech a warrant
       to purchase an additional 142,858 shares of Common Stock at an exercise
       price of $14.00 per share, subject to adjustment, within ten days of the
       filing of the first NDA  for NOVASTAN(R) with the FDA.  If the Company
       is unable to issue any of the additional shares of Common Stock or the
       warrant to Genentech due to circumstances beyond the Company's control,
       the Company has agreed to pay Genentech, in lieu thereof, an amount
       equal to the value of the securities plus interest from May 27, 1993 at
       the prime rate plus one percent, compounded annually.  The value of the
       Common Stock is deemed to be $7.00 per share, which represents the cash
       consideration the Company will be obligated to pay to Genentech as
       liquidated damages, and the value of the warrants is to be determined by
       appraisal, based on the warrants' market value.  The Company will not be
       required to make any cash payment if both of the filing and approval of
       the NDA do not occur.  TBC has also granted Genentech demand and
       piggyback registration rights with regard to shares of Common Stock
       issued to Genentech.

       In connection with the Genentech Agreement, a consultant involved in
       negotiations related to the Agreement will receive a royalty on net
       sales of licensed products.

 (10)  CONSOLIDATION OF IMMUNOPHARMACEUTICS, INC.

       The Company decided to consolidate the IPI operation into TBC's in the
       first half of 1996. The Company believes the goodwill associated with
       IPI, $643,750, was impaired due to the decision to cease operations at
       IPI and the sale of the QED business unit and has charged it to expense
       in the year ended December 31, 1995.  The restructuring costs associated
       with the consolidation of the IPI operation were approximately $421,000
       and have been expensed in the three months ended March 31, 1996.  This
       cost included waste disposal, future lease commitments, severance pay
       and related taxes.

 (11)  COMMITMENTS AND CONTINGENCIES

             Legal Proceedings

             On November 21, 1994, a class action shareholders' suit was filed
             in the United States District Court for the Southern District of
             Texas, Houston Division seeking damages in the amount of $16
             million.  Plaintiffs are two individuals who purchased shares of
             the Company on December 16, 1993 following the Company's initial
             public offering.  In their complaint, plaintiffs have sued the
             Company, and certain members of the board of directors and certain
             officers alleging violations of Sections 11, 12 and 15 of the
             Securities Act of 1933, as amended (the "Act").  Plaintiffs have
             also named David Blech, D. Blech & Co., Incorporated and Isaac
             Blech as defendants. On January 23, 1995, the Company and the
             members of the board of directors filed a motion to dismiss the
             plaintiffs' complaint pursuant to Rule 9(b) and Rule 12b(6) of the
             Federal Rules of Civil Procedure.  In addition, defendant John
             Pietruski, Chairman of the Board of Directors, filed a motion to
             dismiss the plaintiffs' complaint pursuant to Rule 12(b)(2) of the
             Federal Rules of Civil Procedure.  On February 7, 1995, the
             plaintiffs filed a motion for class certification.  The Court
             denied the motion by the Company and by John Pietruski.

             On March 28, 1995, a second class action shareholders' suit was
             filed in the United States District Court for the Southern
             District of New York seeking unspecified damages.  Plaintiffs are
             eight individuals who purchased shares in various companies for
             which D. Blech & Co. acted as an underwriter (or co-underwriter)
             or marketmaker. In their complaint, the plaintiffs have sued the





FORM 10-Q                                                                Page 11
<PAGE>   14
             Company alleging violations of Section 10(b) of the Securities
             Exchange Act of 1934, as Amended (the "Exchange Act") and Rule
             10b-5 promulgated thereunder by the Securities and Exchange
             Commission (the "Commission").  Plaintiffs have named a number of
             defendants, including David Blech and D. Blech & Co., four
             individuals, two brokerage firms, one investment management
             company and ten other companies for which D. Blech & Co. acted as
             underwriter or marketmaker.

             On August 14, 1995, the Judicial Panel on The Multi-District
             Litigation ordered that the action filed in the United States
             District Court for the Southern District of Texas, Houston
             Division be transferred to the United States District Court for
             the Southern District of New York for coordinated or consolidated
             pretrial proceedings with the action pending there.   In light of
             the transfer and consolidation of the Texas case with similar
             cases against other companies for which Blech acted as
             underwriter, the Company requested that the Court in New York
             reconsider the Texas Court's denial of its motion to dismiss as a
             part of the Court's consideration of similar motions to dismiss
             filed by those companies.  All of these motions were presented to
             the Court on February 6, 1996.  On June 6, 1996, the New York
             District Court entered two memorandum opinions in the consolidated
             cases.  In one of its opinions, the Court dismissed all of the
             Exchange Act and common law fraud claims filed against the Company
             and its officers and directors, but afforded those plaintiffs the
             right to attempt to preserve those claims by repleading them.  The
             Court ordered that those claims be repleaded no later than July
             26, 1996.  Plaintiffs did not replead those claims by the
             deadline, resulting in the dismissal of all claims against the
             Company in that litigation.  In its opinion in the second case,
             i.e., the case filed on November 21, 1994, the Court granted the
             Company and its officers and directors' motion for
             reconsideration, but together with all other similar pending
             motions, denied the requested relief.  Pursuant to the court's
             order, the Company therefore filed an answer in that case. The
             Company also filed a Motion seeking leave of court to prosecute an
             immediate appeal of the Court's denial of the Company's Motion to
             Dismiss.  The Court heard argument on that Motion on October 10,
             1996.  The motion was denied on January 16, 1997.  Given the early
             stage of that case, which is the only remaining shareholder
             litigation against the Company, the Company is unable to evaluate
             its potential outcome at this time. The Company disputes these
             claims and intends to contest them vigorously.





FORM 10-Q                                                                Page 12
<PAGE>   15
      ITEM 2.

                 TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY

                        (A DEVELOPMENT STAGE ENTERPRISE)

          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS

                MARCH 31, 1997 (UNAUDITED) AND DECEMBER 31, 1996



                                    OVERVIEW

      The following Management's Discussion and Analysis of Financial Condition
      and Results of Operations contains forward-looking statements that
      involve risks and uncertainties.

      Since its inception in 1989, the Company has primarily devoted its
      resources to fund research, drug discovery and development.  The Company
      has been unprofitable to date and expects to incur substantial losses for
      the next several years as the Company invests in product research and
      development, preclinical and clinical testing and regulatory compliance.
      The Company has sustained net losses of $68,710,722 from inception to
      March 31, 1997.  The Company has primarily financed its operations to
      date through private placements of common stock and debt, which have
      raised an aggregate of $21.3 million in net proceeds, an initial public
      offering ("IPO") of a Unit security which raised an aggregate of $24.2
      million in net proceeds including the over-allotment sold in January
      1994, a private placement of common stock on February 13, 1996, which
      raised $13.0 million in net proceeds and a private placement of preferred
      stock on March 14, 1997, which raised $6.0 million in net proceeds.  On
      July 25, 1994, the Company acquired all of the outstanding stock of IPI
      in exchange for common stock of the Company.  IPI's results of operations
      have been included in the consolidated results of operations beginning
      August 1, 1994.  The Company signed a collaborative agreement with
      Synthelabo, a French pharmaceutical group on October 11, 1994.  Upon
      consummation of the transaction, Synthelabo purchased 1,428,571 shares of
      common stock for a total of $5 million and paid a licensing fee of $3
      million.  In addition, Synthelabo has paid $3 million annually in
      research payments (payable in quarterly installments) for two years and
      paid $750,000 for the third year.  During 1996, TBC signed an agreement
      with Synthelabo to provide copies of certain clinical data. Over the life
      of the agreement TBC may receive as much as $2.9 million, of which $2.3
      million has been received as of March 31, 1997.  The Company's operating
      results have fluctuated significantly during each quarter, and the
      Company anticipates that such fluctuations, largely attributable to
      varying research and development commitments and expenditures, will
      continue for the next several years.  During October 1996, the Company
      executed a research and common stock purchase agreement with LG Chem.  LG
      Chem purchased $5 million in Common Stock of the Company and committed to
      pay up to $10.7 million over a five year period to develop two compounds
      in clinical development.  In March, 1997, the Company sold 6,000 shares
      of 5% Cumulative Convertible Preferred Stock to two institutional
      investors for $6 million.

                             RESULTS OF OPERATIONS

               THREE MONTH PERIODS ENDED MARCH 31, 1997 AND 1996

      Revenues decreased from $1,917,302 in the three month period ended March
      31, 1996 to $800,000 in the same period of 1997, a decrease of 58%.
      Revenues were composed of earned revenues under research agreements,
      sales of products and services, and grant income.  Revenue from research
      agreements decreased primarily due to the amendment to the Synthelabo
      agreement effective November 1, 1996, which





FORM 10-Q                                                                Page 13
<PAGE>   16
      substantially reduced the research payments associated with this
      agreement.  In addition, data payments from Synthelabo were lower in
      1997.

      Total operating expenses decreased 23% from $7,014,273 in the three month
      period ended March 31, 1996 to $5,369,352 in the same period of 1997 due
      primarily to the decrease in research and development expenses.  Research
      and development expenses decreased 22% from $5,480,616 in the three month
      period ended March 31, 1996 to $4,285,054 in the same period of 1997.
      This decrease was primarily attributable to continued decreases in
      research and development activity related to the completion of enrollment
      in certain clinical trials for the compound NOVASTAN(R) (argatroban).
      General and administrative expenses decreased 3% from $1,112,492 in the
      three month period ended March 31, 1996 to $1,084,298 in the same period
      of 1997 due primarily to the consolidation of IPI's operations into TBC.
      Also, in the first quarter of 1996, restructuring and impairment charges
      related to the consolidation of IPI were incurred and were completed
      during 1996.  The Company had 74 employees at March 31, 1997 and 78
      employees at March 31, 1996.

      Other income and expense is composed of investment income on invested
      funds, interest expense and foreign currency exchange gains.  The
      decrease is due to a 36% decrease in investment income from $245,888 in
      the three month period ended March 31, 1996 to $157,388 in the same
      period of 1997, attributed primarily to lower investment balances.

                        LIQUIDITY AND CAPITAL RESOURCES

      The Company has financed its research and development activities to date
      principally through (i) private placements of Common Stock and Preferred
      Stock and an initial public offering of a unit security, (ii) issuances
      of common stock in conjunction with assumption of liabilities and assets
      to acquire IPI and the NOVASTAN(R) license, (iii) revenues from research
      and collaborative agreements, and (iv) investment income, net of interest
      expense.

      The Company expects to incur substantial research and development
      expenditures as it designs and develops biopharmaceutical products for
      the prevention and treatment of cardiovascular diseases.  The Company
      anticipates that operating expenses will continue to increase during 1997
      and subsequent years.  The Company began to incur costs to develop
      NOVASTAN(R) during the third quarter of 1993.  These costs will continue
      during 1997 due to the continuation of clinical trials and will continue
      to be significant through the FDA approval process and additional
      clinical trial work for other clinical indications.  These costs include,
      among other things, hiring personnel to direct and carry out all
      operations related to the clinical trials, paying for hospital and
      procedural costs, services of a contract research organization, and
      purchasing and formulating large quantities of the compound to be used in
      such trials.  In addition, the Company anticipates that the
      administrative costs associated with this effort will be significant.
      The amounts and timing of expenditures will depend on the progress of
      ongoing research and clinical development and product launch costs.

      At March 31, 1997 and December 31, 1996, the Company had cash, cash
      equivalents and short-term investments of approximately $14,243,181 and
      $13,390,291, respectively.  The Company anticipates that its existing
      capital resources should be sufficient to fund its cash requirements into
      the fourth quarter of 1997.  This date is contingent upon various
      factors, including rate of patient enrollment and spending rate for the
      clinical trials of NOVASTAN(R), Selectin and Endothelin compounds, and
      expenditures on research and development of other compounds.  However,
      the Company's existing capital resources will not be sufficient to fund
      the Company's operations through commercialization of its first product.
      Moreover, the Genentech and Synthelabo Agreements require the Company to
      maintain a tangible net worth of at least $5.0 million during the term of
      the Agreements.  If the Company fails to maintain the prescribed net
      worth or fails to exercise due diligence in performing its obligations
      under the Genentech Agreement, Genentech may, at its option, terminate
      the Genentech Agreement or cause the license to become non-exclusive.
      For failure to maintain at least $5.0 million of net worth, Synthelabo
      may require that the technology be transferred to, and





FORM 10-Q                                                                Page 14
<PAGE>   17
      the development program be conducted by, a joint venture owned by TBC and
      Synthelabo. The outcome of certain lawsuits that have been filed against
      the Company could also have an impact on liquidity. See Part II, Item 1.
      Legal Proceedings.

      The Company will need to raise substantial funds for future operations
      and is actively seeking such funding through collaborative arrangements,
      public or private financing, including equity financing, and other
      arrangements.  The Company expects that additional expenditures will be
      required if additional product candidates enter clinical trials which may
      require additional expenditures for laboratory space, scientific and
      administrative personnel, and services of contract research
      organizations.  There can be no assurance that the Company will be able
      to obtain additional financing on acceptable terms or in time to fund any
      necessary or desirable expenditures.  In the event such financing are not
      obtained, the Company's development and research projects will be delayed
      or scaled back.

                               PENDING LITIGATION

             As of March 31, 1997, one class action shareholder lawsuit remains
      pending against the Company and includes certain directors and officers
      as defendants.  The Company disputes all claims set forth in this lawsuit
      and intends to contest it vigorously.  However, the Company is unable to
      evaluate the potential outcome at this time.

                 HAZARDOUS MATERIALS AND ENVIRONMENTAL MATTERS

      The Company's research and development activities involve the controlled
      use of hazardous and radioactive materials.  The Company is subject to
      federal, state, and local laws and regulations governing the use,
      manufacture, storage, handling and disposal of such materials and certain
      waste products.  Management believes that the Company is in compliance
      with all such laws, regulations and standards currently in effect and
      that the cost of compliance with such laws, regulation, and standards
      will not have a material adverse effect on the Company.  The Company does
      not expect to incur any capital expenditures for environmental control in
      the foreseeable future.

                    IMPACT OF INFLATION AND CHANGING PRICES

      The pharmaceutical research industry is labor intensive, and wages and
      related expenses increase in inflationary periods.  The lease of space
      and related building services for the Houston facility contains a clause
      that escalates rent and related services each year based on the increase
      in building operating costs and the increase in the Houston Consumer
      Price Index, respectively.  To date, inflation has not had a significant
      impact on operations.

                DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS

      This Report includes "forward looking statements" within the meaning of
      Section 27A of the Securities Act of 1933, as amended, and Section 21E of
      the Securities Exchange Act of 1934, as amended.  All statements other
      than statements of historical fact included in this Report are forward
      looking statements.  Such forward looking statements include, without
      limitation, statements under (a) "Organization and Significant Accounting
      Policies -- Organization" regarding TBC's expectations for future drug
      discovery and development and related expenditures and (b) "Management's
      Discussion and Analysis of Financial Condition and Results of Operations -
      Liquidity and Capital Resources" - regarding TBC's estimate of sufficiency
      of existing capital resources and ability to raise additional capital to
      fund cash requirements for future operations.  Although TBC believes that
      the expectations reflected in such forward looking statements are
      reasonable, it can give no assurance that such expectations reflected in
      such forward looking statements will prove to have been correct.  The
      ability to achieve TBC's expectations is contingent upon a number of
      factors which include (i) ongoing cost of research and development
      activities, (ii) cost of clinical development of product candidates, (iii)
      attainment of research and clinical goals of product candidates, (iv)
      timely approval of TBC's product candidates by appropriate governmental
      and regulatory agencies, (v)
        




FORM 10-Q                                                                Page 15
<PAGE>   18
       effect of any current or future competitive products, (vi) ability to
       manufacture and market products commercially, (vii) retention of key
       personnel and (viii) obtaining and timing of sufficient financing through
       capital raising or collaborative agreements to fund operations.
        




FORM 10-Q                                                                Page 16
<PAGE>   19
PART II OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

      On November 21, 1994, a class action shareholders' suit was filed in the
      United States District Court for the Southern District of Texas, Houston
      Division seeking damages in the amount of $16 million.  Plaintiffs are
      two individuals who purchased shares of the Company on December 16, 1993
      following the Company's initial public offering.  In their complaint,
      plaintiffs have sued the Company, and certain members of the board of
      directors and certain officers alleging violations of Sections 11, 12 and
      15 of the Securities Act of 1933, as amended (the "Act").  Plaintiffs
      have also named David Blech, D. Blech & Co., Incorporated and Isaac Blech
      as defendants. On January 23, 1995, the Company and the members of the
      board of directors filed a motion to dismiss the plaintiffs' complaint
      pursuant to Rule 9(b) and Rule 12b(6) of the Federal Rules of Civil
      Procedure.  In addition, defendant John Pietruski, Chairman of the Board
      of Directors, filed a motion to dismiss the plaintiffs' complaint
      pursuant to Rule 12(b)(2) of the Federal Rules of Civil Procedure.  On
      February 7, 1995, the plaintiffs filed a motion for class certification.
      The Court denied the motion by the Company and by John Pietruski.

      On March 28, 1995, a second class action shareholders' suit was filed in
      the United States District Court for the Southern District of New York
      seeking unspecified damages.  Plaintiffs are eight individuals who
      purchased shares in various companies for which D. Blech & Co. acted as
      an underwriter (or co-underwriter) or marketmaker. In their complaint,
      the plaintiffs have sued the Company alleging violations of Section 10(b)
      of the Securities Exchange Act of 1934, as Amended (the "Exchange Act")
      and Rule 10b-5 promulgated thereunder by the Securities and Exchange
      Commission (the "Commission").  Plaintiffs have named a number of
      defendants, including David Blech and D. Blech & Co., four individuals,
      two brokerage firms, one investment management company and ten other
      companies for which D.  Blech & Co. acted as underwriter or marketmaker.

      On August 14, 1995, the Judicial Panel on The Multi-District Litigation
      ordered that the action filed in the United States District Court for the
      Southern District of Texas, Houston Division be transferred to the United
      States District Court for the Southern District of New York for
      coordinated or consolidated pretrial proceedings with the action pending
      there.   In light of the transfer and consolidation of the Texas case
      with similar cases against other companies for which Blech acted as
      underwriter, the Company requested that the Court in New York reconsider
      the Texas Court's denial of its motion to dismiss as a part of the
      Court's consideration of similar motions to dismiss filed by those
      companies.  All of these motions were presented to the Court on February
      6, 1996.  On June 6, 1996, the New York District Court entered two
      memorandum opinions in the consolidated cases.  In one of its opinions,
      the Court dismissed all of the Exchange Act and common law fraud claims
      filed against the Company and its officers and directors, but afforded
      those plaintiffs the right to attempt to preserve those claims by
      repleading them.  The Court ordered that those claims be repleaded no
      later than July 26, 1996.  Plaintiffs did not replead those claims by the
      deadline, resulting in the dismissal of all claims against the Company in
      that litigation.  In its opinion in the second case, i.e., the case filed
      on November 21, 1994, the Court granted the Company and its officers and
      directors' motion for reconsideration, but together with all other
      similar pending motions, denied the requested relief.  Pursuant to the
      court's order, the Company therefore filed an answer in that case.  The
      Company also filed a Motion seeking leave of court to prosecute an
      immediate appeal of the Court's denial of the Company's Motion to
      Dismiss.  The Court heard argument on that Motion on October 10, 1996.
      The motion was denied on January 16, 1997.  Given the early stage of that
      case, which is the only remaining litigation against the Company, the
      Company is unable to evaluate its potential outcome at this time. The
      Company disputes these claims and intends to contest them vigorously.

ITEM 2.  CHANGES IN SECURITIES

      On March 14, 1997, the Company completed a $6.0 million private placement
      of 5% Cumulative Convertible Preferred Stock which provided net proceeds
      to the Company of approximately $5.8 million.  The Preferred Stock is
      convertible into Common Stock at discounts ranging from 6% to 17% from
      the average of the daily low trading price of the Common Stock for the
      ten consecutive trading days immediately preceding the conversion date.
      A total of 6,000 shares of Preferred Stock were sold at a price of $1,000
      per share to two





FORM 10-Q                                                                Page 17
<PAGE>   20
      institutional investors.  The Company agreed that it will cause to be
      filed, pursuant to Rule 415 of the Securities Act, an S-3 Registration
      Statement as to the Common Stock into which the Preferred Stock is
      convertible and to gain effectiveness by June 12, 1997.  The Preferred
      Stock holds preferential treatment compared to all other classes of stock
      regarding dividend payments and liquidation.  Dividends have been accrued
      at the rate of five percent (5%) per annum on the amount of Preferred
      Stock outstanding during the quarter and are payable quarterly commencing
      June 30, 1997 when and as declared by the Board of Directors.  In
      accordance with the Certificate of Designation of the Preferred Stock,
      dividends not declared and paid are considered additions to the Preferred
      Stock amount at the time of conversion and can be paid in Common Stock of
      the Company at time of conversion.  The liquidation preference (which
      included accrued dividends) amount of Preferred Stock at March 31, 1997
      is $6,013,973.  As of March 31, 1997, none of  the Preferred Stock has
      been converted and no dividends have been declared or paid.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

      None

ITEM 4.  SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS

      None

ITEM 5.  OTHER INFORMATION

      None

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

      EXHIBIT NO.             DESCRIPTION
      -----------             -----------

       4 .8  (1)            Certificate of Designations of 5% Cumulative
                            Convertible Preferred Stock for Texas Biotechnology
                            Corporation

       10.6  (1)            Preferred Stock Investment Agreement dated March
                            13, 1997 between Texas Biotechnology Corporation
                            and certain investors

       10.61 (1)            Registration Rights Agreement dated March 13, 1997
                            between Texas Biotechnology Corporation and certain
                            investors

       27.1                 Financial Data Schedule

----------------------

*   The Company has omitted certain portions of this agreement in reliance on
    Rule 24b-2 under the Securities and Exchange Act of 1934, as amended.

(1) Filed as an exhibit to the Company's Form 8-K (File No. 1-12574) filed with
    the Securities and Exchange Commission (the "Commission") on April 2, 1997
    and incorporated herein by reference.





FORM 10-Q                                                                Page 18
<PAGE>   21
                        TEXAS BIOTECHNOLOGY CORPORATION

                                 MARCH 31, 1997

                                   SIGNATURES




Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, on the 8th day of May, 1997.




                                           TEXAS BIOTECHNOLOGY CORPORATION


                                           By:  /s/ DAVID B. MCWILLIAMS
                                              ----------------------------------
                                                David B. McWilliams
                                                President and Chief Executive 
                                                Officer





                                           By:  /s/ STEPHEN L. MUELLER
                                              ----------------------------------
                                                Stephen L. Mueller
                                                Vice President of Administration
                                                Secretary and Treasurer
                                                (Principal Financial and 
                                                Accounting Officer)






FORM 10-Q                                                                Page 19
<PAGE>   22
                              INDEX TO EXHIBITS

Exhibit No.                 Description of Exhibit
-----------                 ----------------------

  4 .8  (1)            Certificate of Designations of 5% Cumulative
                       Convertible Preferred Stock for Texas Biotechnology
                       Corporation

  10.6  (1)            Preferred Stock Investment Agreement dated March
                       13, 1997 between Texas Biotechnology Corporation
                       and certain investors

  10.61 (1)            Registration Rights Agreement dated March 13, 1997
                       between Texas Biotechnology Corporation and certain
                       investors

  27.1                 Financial Data Schedule

--------------------

*   The Company has omitted certain portions of this agreement in reliance on
    Rule 24b-2 under the Securities and Exchange Act of 1934, as amended.

(1) Filed as an exhibit to the Company's Form 8-K (File No. 1-12574) filed with
    the Securities and Exchange Commission (the "Commission") on April 2, 1997
    and incorporated herein by reference.





FORM 10-Q                                                                Page 20