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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

For the quarterly period ended March 31, 2004

OR

For the transition period from              to             

Commission file number: 000-30231

TANOX, INC.

(Exact Name of Registrant as Specified in Its Charter)

(713) 578-4000

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

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

Number of shares of common shares outstanding at May 6, 2004: 43,942,526.

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TANOX, INC.

FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2004

INDEX

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PART I

FINANCIAL INFORMATION

TANOX, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Shares and Per Share data)

See accompanying notes to condensed consolidated financial statements.

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TANOX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(In Thousands, Except Per Share data)

See accompanying notes to condensed consolidated financial statements.

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TANOX, INC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In Thousands)

See accompanying notes to condensed consolidated financial statements.

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TANOX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2004

(UNAUDITED)

The accompanying unaudited condensed consolidated interim financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X and include the accounts of Tanox, Inc. and its wholly owned subsidiary (collectively the Company or Tanox). Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles in the United States for complete financial statements. In the opinion of management, all adjustments considered necessary for fair presentation have been included. All such adjustments are of a normal recurring nature. These condensed consolidated interim financial statements and notes thereto should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2003. Operating results for the three month period ended March 31, 2004 are not necessarily indicative of the operating results that may be expected for the year ending December 31, 2004.

Development Agreements and Licensing Fees. Development agreement revenue for the current quarter included $6.6 million received under the terms of the Tripartite Collaboration Agreement between Novartis Pharma A.G. (Novartis), Genentech, Inc. (Genentech) and Tanox dated February 25, 2004, where Genentech and Novartis reimbursed Tanox for a portion of its TNX-901 development costs. Development agreement revenue also includes reimbursement by its collaboration partners, Genentech and Novartis, of selected current quarter clinical trial costs incurred for TNX-901. No licensing fee revenue has been recorded in 2004.

Royalties. Tanox recorded royalties of $2.3 million on the net sales of Xolair by Genentech and Novartis during the current quarter. Genentech and Novartis reported Xolair sales of $30.2 million for the first quarter of 2004 in the United States and Europe, 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 7. Commitments and Contingencies). After giving effect to 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 and other credits against royalties and profit sharing may cause the overall rate to fall below this range in 2004.

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 the available-for-sale investment are reported as other comprehensive income (loss), which is a separate component of stockholders’ equity.

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Tanox’s net carrying value of cash and cash equivalents (including restricted cash) at March 31, 2004 and December 31, 2003, was $74.9 million and $56.9 million, respectively.

Investments consist of the following (in thousands):

Tanox’s net carrying value of held-to-maturity investments at March 31, 2004 and December 31, 2003, was $142.0 million and $170.5 million, respectively. The fair value of these investments at March 31 2004 and December 31, 2003, was $141.7 million and $170.6 million, respectively. As of March 31, 2004, investments in securities with credit ratings of A were 37%, AA were 21% and AAA were 42% of the total held-to-maturity investment portfolio.

Tanox borrowed $5.0 million in September 2002 from a bank under a $16.0 million Revolving Line of Credit Note Agreement. Under the term 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 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 March 31, 2004 was 2.125%. The Note is collateralized with cash and investments equal to or greater than 100% of the outstanding principal balance of the Note.

The following is a reconciliation of basic and diluted earnings per share for the three months ended March 31, 2004 (in thousands, except per share data):