UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, ~~2006~~2007

¨	TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 000-30231

TANOX, INC.

(Exact Name of Registrant as Specified in Its Charter)


Delaware		76-0196733
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)

10301 Stella Link
Houston, Texas		77025
(Address of Principal Executive Offices)		(Zip Code)

(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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Number of shares of common shares outstanding at ~~April~~May 282, ~~2006~~2007: 4445,~~970~~709,~~321~~355.

TANOX, INC.

FORM 10-Q FOR THE QUARTER ENDED MARCH 31, ~~2006~~2007

INDEX

		Page
Part I – Financial Information
Item 1 – Financial Statements
Condensed Consolidated Balance Sheets at March 31, 2006 and December 31, 2005		1
Condensed Consolidated Balance Sheets at March 31, 2007 (unaudited) and December 31, 2006		1
Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2006 and 2005		2
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended March 31, 2007 (unaudited) and March 31, 2006 (unaudited)		2
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2006 and 2005		3
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2007 (unaudited) and March 31, 2006 (unaudited)		3
Notes to Condensed Consolidated Financial Statements		4
Notes to Condensed Consolidated Financial Statements (unaudited)		4
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations		910
Item 3 – Quantitative and Qualitative Disclosures About Market Risk		1516
Item 4 – Controls and Procedures		1516
Part II – Other Information		1617
Item 1 – Legal Proceedings		1617
Item 1A – Risk Factors		1617
Item 6 – Exhibits		16
Item 4 – Submission of Matters to a Vote of Security Holders		18
Signatures		17
Item 6 – Exhibits		18
Signatures		19
Exhibit Index		20

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

TANOX, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Shares and Per Share ~~data~~Data)

	March 31, 2006			December 31, 2005
	March 31, 2007			December 31, 2006
	(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	6667,~~470~~037		$	4654,~~732~~150
Short-term investments		~~100~~102,~~117~~451			~~106~~119,~~228~~079
Interest receivable		~~763~~836			~~799~~998
Accounts receivable		911,~~495~~108			2911,~~335~~747
Accounts receivable from related party		~~248~~3,115			~~122~~1,887
Prepaid expense and other		2,574			2,359
Prepaid expenses and other		1,753			1,841
Total current assets		~~179~~186,~~667~~300			~~185~~189,~~575~~702
LONG-TERM INVESTMENTS		524,~~300~~690			11,~~541~~852
PROPERTY PLANT & EQUIPMENT, NET		3128,~~146~~141			3129,~~214~~227
OTHER ASSETS		21,~~504~~414			1,~~606~~327
TOTAL ASSETS	$	~~218~~240,~~617~~545		$	~~229~~232,~~936~~108
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	~~2,846~~996		$	21,~~615~~379
Accrued liabilities		45,~~169~~696			47,~~913~~133
Accrued arbitration award		12,~~917~~479			82,~~967~~393
Total current liabilities		89,~~932~~171			1610,~~495~~905
LONG-TERM LIABILITIES:
Deferred revenue		1,000			1,000
Total long-term liabilities		1,000			1,000
STOCKHOLDERS’ EQUITY:
Preferred stock, $.01 par value; 10,000,000 shares authorized; none outstanding		—			—
Preferred stock, $.01 par value per share; 10,000,000 shares authorized; none outstanding		—			—
Common stock, $.01 par value; 120,000,000 shares authorized; 45,523,695 and 45,466,957 shares issued, and 44,968,995 and 44,912,257 shares outstanding in 2006 and 2005, respectively		455			455
Common stock, $.01 par value per share; 120,000,000 shares authorized; 46,242,513 and 46,065,563 shares issued, and 45,687,813 and 45,510,863 shares outstanding, in 2007 and 2006, respectively		462			461
Additional paid-in capital		~~333~~351,~~243~~460			~~331~~341,~~822~~771
Treasury stock, at cost; 554,700 shares in 2006 and 2005, respectively		(6,261	)		(6,261	)
Treasury stock, at cost; 554,700 shares in 2007 and 2006		(6,261	)		(6,261	)
Accumulated other comprehensive income		~~688~~9			~~684~~59
Accumulated deficit		(~~118~~115,~~440~~296	)		(~~113~~115,~~259~~827	)
Total stockholders’ equity		~~209~~230,~~685~~374			~~213~~220,~~441~~203
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	~~218~~240,~~617~~545		$	~~229~~232,~~936~~108

See accompanying notes to condensed consolidated financial statements.

TANOX, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS ~~AND COMPREHENSIVE LOSS~~

AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(In Thousands, Except Per Share ~~data~~Data)

	Three Months Ended March 31,
	Three Months EndedMarch 31,
	2006			2005
	2007			2006
REVENUES:
Royalties, net	$	89,~~537~~962		$	58,~~875~~537
Royalties from related party, net		~~214~~1,031			34214
Profit share from related party, net		12,~~043~~665			—1,043
Development agreements, license fees and manufacturing rights		112,945			1011
Development agreements from related party		101,970			910
Total revenues		918,~~815~~573			59,~~928~~815
OPERATING EXPENSES:
Research and development		1314,~~961~~370			1113,~~740~~961
Acquired in-process research and development		—			13,680
General and administrative		5,797			2,794
General and administrative		2,794			1,933
Total operating expenses		20,167			16,755
Total operating expenses		16,755			27,353
LOSS FROM OPERATIONS		(1,594	)		(6,940	)
LOSS FROM OPERATIONS		(6,940	)		(21,425	)
OTHER INCOME (EXPENSES):
Interest income		12,~~788~~423			1,~~034~~788
Interest expense		—			(45	)
Other, net		(153	)		(29	)
Other, net		(29	)		(26	)
Total other income		2,270			1,759
Total other income		1,759			963
INCOME (LOSS) BEFORE INCOME TAXES		676			(5,181	)
NET LOSS	$	(5,181	)	$	(20,462	)
Provision for income taxes		145			—
BASIC and DILUTED NET LOSS PER SHARE	$	(0.12	)	$	(0.46	)
NET INCOME (LOSS)	$	531		$	(5,181	)
SHARES USED IN COMPUTING NET LOSS PER SHARE:
NET EARNINGS (LOSS) PER SHARE – Basic and diluted	$	0.01		$	(0.12	)
Basic and Diluted		44,694			44,050
SHARES USED IN COMPUTING EARNINGS (LOSS) PER SHARE:
COMPREHENSIVE LOSS:
Basic		45,029			44,694
Net loss	$	(5,181	)	$	(20,462	)
Diluted		45,431			44,694
Foreign currency translation adjustment		1			—
COMPREHENSIVE INCOME (LOSS):
Unrealized gain (loss) on available-for-sale securities		3			(341	)
Net income (loss)	$	531		$	(5,181	)
TOTAL COMPREHENSIVE LOSS	$	(5,177	)	$	(20,803	)
Foreign currency translation adjustment		2			1
Unrealized gain (loss) on available-for-sale securities		(52	)		3
TOTAL COMPREHENSIVE INCOME (LOSS)	$	481		$	(5,177	)

See accompanying notes to condensed consolidated financial statements.

TANOX, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In Thousands)

	Three Months Ended March 31,
	Three Months EndedMarch 31,
	2006			2005
	2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(5,181	)	$	(20,462	)
Net income (loss)	$	531		$	(5,181	)
Adjustments to reconcile net loss to net cash used in operating activities:
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		1,~~065~~133			~~947~~1,065
Amortization of intangible		3839			—38
Acquired in-process research and development		—			13,680
Loss on available-for-sale investment		114			—
Compensation expense related to stock options		736			15
Loss on sale of equipment		8			—
Compensation expense related to stock options		7,445			736
Changes in operating assets and liabilities:
(Increase) decrease in receivables and other assets		~~18,599~~(465	)		(218,~~817~~599	)
(Decrease) increase in current liabilities		(7,563	)		35
Decrease in current liabilities		(1,735	)		(7,563	)
Net cash (used in) provided by operating activities		7,694			(8,602	)
Net cash provided by operating activities		7,070			7,694
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment		(~~997~~55	)		(~~5,135~~997	)
Cash paid for acquisition of in-process research and development		—			(6,000	)
Purchases of investments		(46,484	)		(44,701	)
Purchases of investments		(44,701	)		(47,792	)
Maturities and sales of investments		50,108			57,056
Maturities and sales of investments		57,056			69,325
Net cash provided by investing activities		3,569			11,358
Decrease (increase) in restricted cash		—			(27	)
Net cash provided by investing activities		11,358			10,371
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock		685			273
Proceeds from issuance of common stock		2,246			685
Net cash provided by financing activities		~~685~~2,246			~~273~~685
IMPACT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS		12			—1
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		19,738			2,042
INCREASE IN CASH AND CASH EQUIVALENTS		12,887			19,738
CASH AND CASH EQUIVALENTS:
Beginning of period		4654,~~732~~150			546,~~284~~732
End of period	$	6667,~~470~~037		$	766,~~326~~470
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Unrealized gain (loss) on available-for-sale securities		3(52	)		~~(341~~3	)
Common stock issued for acquisition of in-process research and development		—			7,680

See accompanying notes to condensed consolidated financial statements.

TANOX, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, ~~2006~~2007

(~~unaudited~~Unaudited)

1. Basis of Consolidation

The accompanying unaudited condensed consolidated ~~interim~~ financial statements have been prepared in accordance with United States generally accepted accounting principles for interim financial information and inpursuant ~~accordance~~to ~~with~~ the ~~instructions~~rules toand ~~Form~~regulations ~~10-Q~~of ~~and~~the ~~Article~~Securities 10and ofExchange ~~Regulation~~Commission ~~S-X~~ and include the accounts of Tanox, Inc. and its wholly owned subsidiaries (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 a fair presentation have been ~~included.~~made ~~All~~and 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, ~~2005~~2006. Operating results for the three ~~month~~months ~~period~~ ended March 31, ~~2006~~2007 are not necessarily indicative of the operating results that may be expected for the ~~year~~entire ~~ending~~fiscal ~~December 31, 2006~~year.

2.Proposed Merger with ~~Revenues~~Genentech and Green Acquisition Corporation

~~Xolair~~On ~~Collaboration.~~November 9, ~~Under~~2006, ~~the~~we ~~collaboration~~entered ~~agreements~~into an agreement and plan of merger with Genentech, Inc. (“Genentech”) and ~~Novartis~~Green ~~Pharma~~Acquisition ~~AG (Novartis)~~Corporation, a wholly-owned subsidiary of Genentech, pursuant to which Genentech would acquire Tanox ~~receives~~for aapproximately ~~royalty~~$919 onmillion ~~the~~in ~~net~~cash. ~~sales~~Under the terms of ~~Xolair~~the ~~worldwide~~agreement, Green Acquisition will merge with and ~~shares~~into inTanox, ~~Novartis’~~and ~~net~~the ~~profits~~stockholders ~~from~~of ~~Xolair~~Tanox ~~sales~~will receive $20.00 in ~~the~~cash Ufor each share held, less any applicable withholding tax.S. ~~Royalty~~In ~~revenues~~addition, each option to purchase Tanox common stock outstanding at the time of ~~$8.8~~the ~~million~~merger will be canceled and the option holder entitled to receive a cash amount equal to the product of (i) the number of shares of Tanox common stock as to which the option remains unexercised, multiplied by (ii) the amount, if any, by which $520.900 exceeds ~~million~~the onexercise price of the ~~net~~option, ~~sales~~less any applicable withholding tax. The boards of ~~Xolair~~directors of both companies and the stockholders of Tanox have approved the transaction, ~~for~~which remains subject to expiration of the ~~quarters~~waiting ~~ended~~period under the ~~March~~Hart-Scott-Rodino Antitrust Improvements Act and the satisfaction of other customary closing conditions. On January 3129, ~~2006~~2007, we and ~~2005~~Genentech announced that we had received a Request for Additional Information and Documentary Materials, commonly ~~respectively~~referred to as a “second request,” ~~were~~from ~~calculated~~the ~~based~~FTC onin ~~net~~connection ~~sales~~with ~~reported~~the toproposed ~~Tanox~~acquisition, bywhich extends the waiting period. We and Genentech continue to work with the FTC, and ~~Novartis.~~we ~~Royalty~~now ~~revenue~~expect isthat ~~net~~the oftransaction ~~amounts~~will ~~which~~close within ~~are~~the ~~payable~~third byquarter ~~Tanox~~of to2007, ~~its~~subject ~~former~~to ~~attorneys~~expiration ~~(see~~of ~~Note~~the 7.waiting ~~“Commitments~~period and ~~Contingencies”)~~ the satisfaction of other customary closing conditions, including the absence of any material adverse effect having occurred in respect of Tanox.

InNew ~~the~~Accounting ~~first~~Pronouncement ~~quarter of 2006, Tanox recorded net profit sharing of $1.0 million from Novartis, which is related to the fourth quarter of 2005, as the profit-sharing calculation is one quarter in arrears.~~

~~Tanox~~The ~~receives~~Company ~~manufacturing~~adopted ~~rights~~the provisions ~~revenue~~of ~~from Genentech~~Financial ~~and~~Accounting ~~Novartis~~Standards inBoard ~~consideration~~(FASB) ~~for~~Interpretation ~~Tanox’s~~No. 48, ~~relinquishment~~“Accounting for Uncertainty in ~~2004~~Income ofTaxes ~~any~~– ~~rights~~an itInterpretation ~~had~~of toFASB ~~manufacture~~Statement ~~Xolair~~No. 109,” ~~Manufacturing-rights~~(FIN ~~revenue~~48) ison ~~based~~January 1, on2007. This interpretation clarifies the ~~quantity~~accounting offor ~~Xolair~~uncertainty ~~produced~~in income taxes recognized in ~~the~~an ~~previous~~enterprise’s ~~quarter~~financial statements in accordance with FASB Statement 109, as“Accounting ~~the~~for ~~calculation~~Income isTaxes.” ~~one~~The interpretation prescribes a ~~quarter~~recognition inthreshold ~~arrears.~~and ~~Under~~measurement ~~the~~attribute ~~formula~~for a tax position taken or expected to be taken in ~~the~~a ~~collaboration~~tax ~~agreements,~~return noand ~~amounts~~provides ~~were~~guidance ~~due~~on toderecognition, ~~Tanox~~classification, ~~for~~interest ~~manufacturing-rights~~and ~~revenue~~penalties, ~~from~~accounting ~~the~~for ~~fourth~~interim ~~quarter~~periods, ofdisclosure ~~2005~~and transition.

~~Novartis~~The ~~profit~~Company ~~sharing~~is ~~and~~not ~~rest~~subject to federal, state, local or non-~~of-world~~US ~~royalty~~income ~~payments~~tax ~~are~~examinations ~~net~~by oftax ~~certain~~authorities ~~credits,~~for ~~which,~~any atyears ~~March 31,~~before 1986. ~~2006,~~There ~~had~~have abeen ~~remaining~~no ~~balance~~extensions of ~~approximately~~the ~~$719,000~~statute of limitations.

~~Development~~The ~~Agreements~~adoption ~~and~~of ~~Licensing~~FIN ~~Fees.~~48 ~~Development~~did ~~agreement~~not ~~revenue~~have ~~includes~~a ~~reimbursement~~material ~~from~~impact ~~Genentech~~on ~~and~~our ~~Novartis of selected clinical~~financial ~~trial~~position. ~~costs~~Tanox ~~incurred~~has ~~for~~an ~~TNX-901.~~estimated ~~Licensing~~research ~~fee~~and ~~revenue~~development ~~includes~~(R&D) ~~payments~~tax ~~received~~carryforward ~~from~~of ~~various~~$6.5 ~~parties~~million inas ~~exchange~~of ~~for~~December 31, ~~rights~~2006 ~~to license~~ and ~~sublicense~~March 31, ~~Tanox’s technology or product rights~~2007. Due

to limited documentation to substantiate the R&D tax credit, it is uncertain that this tax position would be sustained upon examination by a taxing authority. Therefore, as of January 1, 2007, the Company had approximately $6.5 million of uncertain tax benefits that, if recognized, would impact our tax expense calculation. It is expected that the amount of uncertain tax benefits could change in the next 12 months; however, we do not expect the change to have a significant impact on the results of operations or financial position of the Company. The Company does not expect the total uncertain tax benefit to significantly change due to the settlement of audits, expiration of statutes or other events prior to March 31, 2008.

The Company’s policy is to classify interest and penalties on uncertain tax benefits in income taxes. We believe the uncertain tax benefits related to the R&D tax credit carryforward would result in no related penalty or interest expense if recognized.

2. Revenues

Xolair Collaboration. Under its collaboration agreements with Genentech and Novartis Pharma AG (Novartis), Tanox receives a royalty on the net sales of Xolair worldwide and shares in Novartis’ net profits from Xolair sales in the U.S. Royalty revenues of $11.0 million and $8.8 million for the three months ended March 31, 2007 and 2006, respectively, were calculated based on net sales reported to Tanox by Genentech and Novartis. Royalty revenue is net of amounts which are payable by Tanox to its former attorneys (see Note 6. “Commitments and Contingencies”).

Tanox recorded net profit sharing revenue of $2.7 million and $1.0 million for the three months ended March 31, 2007 and 2006, respectively. Tanox also receives manufacturing rights revenue from Genentech and Novartis in consideration for Tanox’s relinquishment in 2004 of any rights it had to manufacture Xolair. Manufacturing rights revenue is based on the quantity of Xolair produced, as defined in our collaboration agreement. For the three months ended March 31, 2007, Tanox recorded manufacturing rights revenue of $2.9 million. Profit sharing and manufacturing-rights revenue is calculated and recognized one quarter in arrears. Novartis profit sharing and rest-of-world royalty payments are net of certain credits, all of which had been used at September 30, 2006.

Development Agreements and Licensing Fees. Development agreement revenue includes reimbursement of certain clinical trial costs. Development agreements revenue for the three months ended March 31, 2007 includes $2.0 million earned as reimbursement by Novartis of a portion of Tanox’s development costs for a high affinity anti-IgE program. Licensing fee revenue includes payments received from various parties in exchange for rights to license and sublicense Tanox’s technology or product rights.

3. Cash, Cash Equivalents, Short-term and Long-term Investments

Cash equivalents consist of highly- liquid investments with original maturities of three months or less. Management determines the appropriate classification of ~~its~~ cash equivalents, short-term investments and long-term investments at the time of purchase. Investments consist of investment grade corporate bonds, commercial paper, ~~asset-backed~~certificates ~~securities~~of deposit, auction-rate securities and government agency securities with maturities of less than three years from the balance sheet date. Certain investments are classified as held-to-maturity and carried at amortized cost in the accompanying financial statements. The Company’s available-for-sale investments are stated at fair value based on the quoted market price of the investment. Unrealized gains and losses on available-for-sale investments are reported as other comprehensive income (loss), which is a separate component of stockholders’ equity~~. For the three months ended March 31~~, ~~2006,~~unless ~~the fair value of Tanox’s available-for-sale investments increased by $3,000 versus~~ a ~~decrease~~decline in value ofis ~~$341,000~~considered ~~for~~to ~~the~~be ~~three~~other ~~months~~than ~~ended March 31, 2005~~temporary.

Tanox’s net carrying value of cash and cash equivalents at March 31, 2006 and December 31, 2005, was $66.5 million and $46.7 million, respectively.

Investments consist of the following (in thousands):

	March 31, 2006		December 31, 2005
Held-to-maturity investments – short-term	$	70,492	$	61,131
Available-for-sale investments		29,625		45,097
Total short-term investments		100,117		106,228
Held-to-maturity investments – long-term		5,300		11,541
	$	105,417	$	117,769

The fair value of these investments at March 31, 2006 and December 31, 2005, was $105.1 million and $117.4 million, respectively.

4. Acquisitions

Manufacturing Assets and Long-term Lease. Pursuant to a Lease Assignment and Asset Purchase Agreement dated December 9, 2004, between Biogen Idec, Inc. and Tanox, on January 10, 2005, Tanox acquired from Biogen Idec certain manufacturing, process development and quality control equipment, related documentation and furniture and fixtures housed in a 76,000 square foot leased facility located in San Diego, California. The Company paid Biogen Idec approximately $5.6 million for the assets and allocated $4.6 million as property, plant and equipment and $1.0 million as an intangible asset for manufacturing equipment documentation, included in other assets on the balance sheet. Tanox also agreed to assume the obligations of Biogen Idec under a lease for the facility, which extends until September 30, 2011.

Anti-Tissue Factor Program. On March 31, 2005, the Company acquired a tissue factor antagonist program for the potential treatment of acute lung injury (ALI)/acute respiratory distress syndrome (ARDS) from Sunol Molecular Corporation (Sunol). In addition to ALI/ARDS, Tanox believes the anti-tissue factor monoclonal antibodies acquired from Sunol have the potential to treat cancer and other diseases that result from over expression of tissue factor and related coagulation abnormalities. In consideration for the tissue factor antagonist program, the Company issued an aggregate of 800,000 shares of its common stock and paid $6.0 million in cash to Sunol. Of the shares issued, 275,000 are being held in escrow for up to three years after closing to secure indemnification obligations under the Asset Purchase Agreement. As part of the program, the Company received all tissue factor antagonist assets of Sunol, including anti-tissue factor monoclonal antibodies and related technologies and intellectual property, as well as non-exclusive rights to certain technologies and related intellectual property for protein and antibody expression. Based upon the closing price of the Company’s common stock on March 31, 2005, the fair value of the acquired assets was $13.7 million, including

~~the~~The $6fair ~~million~~value ~~paid~~of a security in ~~cash.~~Tanox’s Asavailable-for-sale ofinvestments ~~the~~decreased ~~acquisition~~by ~~date~~$166,000 for the three ~~acquired~~months ~~program~~ended ~~was~~March 31, ~~still~~2007 inwhich ~~early~~was ~~development stage, had~~ not ~~reached~~considered ~~technological~~by ~~feasibility and~~management ~~had~~to nobe ~~alternative~~temporary. ~~future~~As ~~use.~~a ~~Accordingly~~result, ~~the~~$52,000 ~~Company~~was ~~recorded~~reported ~~the~~as ~~$13.7~~other ~~million~~comprehensive ~~purchase~~loss ~~price~~to asoffset anpreviously ~~acquired~~recorded temporary increases in~~-process~~ ~~research~~value and ~~development~~a ~~expense~~loss inof $114,000 was recognized for the ~~first~~three ~~quarter~~months ofended ~~2005~~March 31, 2007 and included in other income.

5Tanox’s net carrying value of cash and cash equivalents at March 31, 2007 and December 31, 2006, was $67.0 ~~Net~~million ~~Loss~~and ~~per~~$54.2 ~~Share~~million, respectively.

~~Financial~~Investments ~~Accounting~~consist ~~Standards Board No. 128, “Earnings Per Share,” requires dual presentation~~ of ~~basic and diluted net loss per share (EPS). Basic EPS is computed by dividing net loss by~~ the ~~weighted~~following ~~average number of shares of common stock outstanding during the year. Diluted EPS is computed~~ (in ~~the~~thousands): same manner as basic EPS, except that diluted EPS reflects the potential dilution that would occur if outstanding options were exercised. Tanox incurred net losses for the three month periods ended March 31, 2006 and 2005; therefore, all options outstanding for each of the years were excluded from the computation of diluted EPS because they would have been antidilutive.

6. Stock-Based Compensation


	March 31, 2007		December 31, 2006
Held-to-maturity investments – short-term	$	52,449	$	65,246
Available-for-sale investments		50,002		53,833

Total short-term investments		102,451		119,079
Held-to-maturity investments – long-term		24,690		11,852

	$	127,141	$	130,931

The fair value of these investments at March 31, 2007 and December 31, 2006, was $127.1 million and $130.8 million, respectively.

4. Earnings (Loss) per Share

The following is a reconciliation of basic and diluted earnings per share for the three months ended March 31, 2007 and 2006 (in thousands, except per share data):


	Three Months Ended March 31,
	2007		2006
Basic earnings (loss) per share	$	0.01	$	(0.12	)

Average shares outstanding – basic		45,029		44,694
Potential shares exercisable under stock option plans		402		—

Adjusted average shares outstanding – diluted		45,431		44,694

Diluted earnings (loss) per share	$	0.01	$	(0.12	)

Basic earnings per share was computed based on the weighted average number of common shares outstanding. Diluted earnings per share was computed based on the weighted average number of common shares outstanding adjusted by the number of additional shares that would have been outstanding had the potentially dilutive common shares been issued and includes outstanding stock options. Diluted earnings per share excluded 412,000 shares related to stock options for the three months ended March 31, 2007 as these shares would have been antidilutive.

5. Share-Based Compensation

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (FAS) No. 123 (revised 2004, or FAS 123R), “Share-Based Payment.” FAS 123R supersedes Accounting Principals Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and requires companies to recognize compensation expense, using a fair-value based method, for costs related to share-based payments, including stock options and employee stock purchase plans. FAS 123R permits public companies to adopt its requirements using either the modified prospective or modified retrospective transition method.

The Company adopted FAS 123R on January 1, 2006 using the modified prospective transition method, that requires that stock-based compensation is recognized for all awards granted, modified or settled after the effective date as well as for all awards granted to employees prior to the effective date that remain unvested as of the effective date. For the three months ended March 31, 2006, the Company recorded approximately $693,000 of stock-based compensation expense, of which $332,000 was included in research and development expense and $361,000 was included in general and administrative expense. The adoption of FAS 123R had the impact of an increase of $0.02 per share on the Company’s net loss per share for the three months ended March 31, 2006. The adoption of FAS 123R had no impact on cash flow from operations and cash flow from financing activities for the three months ended March 31, 2006. Stock-based compensation for all non-vested options outstanding as of March 31, 2006 is $9.7 million, which will be recognized over a weighted-average period of 1.63 years. The Company amortizes stock-based compensation expense on a straight-line basis over the expected life of the vesting period.

The Company estimated the fair value of stock options during the three months ended March 31, 2006 using the Black-Scholes-Merton option pricing model. The assumptions used under this model are as follows: 1) the expected term of the options was estimated to be 7 years using historical option exercise data; 2) the expected volatility was estimated to be 63% based on the Company’s historical stock price volatility; 3) the risk-free interest rate of 4.83% is based on the U.S. Treasury zero-coupon issues with a remaining term equal to the expected term of the option; and 4) the Company assumed a zero percent dividend yield. Under FAS 123R, the fair value of stock options granted is recognized as expense over the service period, net of estimated forfeitures. Based on historical data, the Company calculated a 31% estimated forfeiture rate, which it believes is a reasonable assumption to estimate forfeitures. To the extent actual forfeitures differ from our current estimates, cumulative adjustments to stock-based compensation expense will be recorded in the period estimates are revised.

Prior to the adoption of FAS 123R on January 1, 2006, Tanox accounted for its stock-based compensation expense under the recognition and measurement provisions of APB Opinion No. 25, “Accounting

The Company adopted FAS 123R on January 1, 2006 using the modified prospective transition method ~~for~~which ~~Stock~~requires ~~Issued~~that toshare-based ~~Employees~~compensation is recognized for all awards granted, ~~and~~modified ~~Related~~or ~~Interpretations.”~~settled ~~Under~~after the ~~intrinsic~~effective ~~value~~date ~~method~~as ~~described~~well inas ~~APB~~for ~~Opinion~~all Noawards granted to employees prior to the effective date that remain unvested as of the effective date. For the three months ended March 2531, no2007, the Company recorded approximately $7.4 million of share-based compensation expense, ~~was~~including ~~recognized~~the ifaccelerated ~~the~~vesting ~~exercise~~of ~~price~~options, of which $3.7 million was included in research and development expense and $3.7 million was included in general and administrative expense. Under the terms of employee and director stock option ~~equaled~~agreements, the ~~market~~shareholder ~~price~~approval of the ~~underlying~~merger ~~stock~~agreement between the Company, Genentech and Green Acquisition Corporation, a wholly-owned subsidiary of Genentech on January 15, 2007, was considered a change in control, which resulted in all employee and director options outstanding under the option agreements becoming fully vested on the date of ~~grant~~the approval. ~~Assuming~~ For the ~~compensation~~three ~~cost~~months ~~for~~ended March 31, 2006, the Company recorded approximately $693,000 of stock-based ~~option~~compensation ~~plans~~expense, ~~had~~of ~~been~~which ~~determined~~$332,000 ~~pursuant~~was toincluded ~~the~~in ~~fair~~research ~~value~~and development expense and $361,000 was included in general and administrative ~~method~~expense. ~~under~~The ~~SFAS~~adoption Noof FAS 123R and the accelerated vesting of options resulted in a decrease in earnings of $0.16 per share for the three months ended March ~~123~~31, ~~Tanox’s~~2007 ~~pro~~and ~~forma~~an increase of $0.02 per share of the Company’s net loss per share for the three months ended March 31, ~~2005~~2006. ~~would~~The ~~have~~adoption ~~been~~of asFAS ~~follows~~123R ~~(in~~had ~~thousands,~~no ~~except~~impact ~~per~~on ~~share~~cash ~~data):~~flow from operations and cash flow from financing activities for the three months ended March 31, 2007 and 2006.

	Three Months ended March 31,2005
Net loss -
As reported	$	(20,462	)
Stock option compensation expense if the fair value method had been applied		(2,064	)
Pro forma net loss	$	(22,526	)
Loss per share – Basic and Diluted
As reported	$	(0.46	)
Pro forma	$	(0.51	)

The Company estimated the fair value of stock options at the date of the grant using the Black-Scholes-Merton option pricing model, with the following weighted average assumptions:

The assumptions used for the valuation of options granted during the three months ended March 31, 2005 were: expected term of 5 years; risk-free interest rate of 4.13%; expected volatility of 67%, an expected dividend yield of zero percent and a forfeiture rate of 10%.


	Three Months Ended March 31,
	2007*	2006
Risk-free interest rate	—	4.83	%
Expected dividend yield	—	0	%
Expected life	—	7 years
Expected volatility	—	63	%
Expected forfeiture rate	—	31	%

At* ~~March 31,~~No ~~2006,~~stock ~~the~~options ~~Company~~were ~~has~~granted during the ~~following~~three ~~stock-based~~month ~~compensation~~period ~~plans:~~ended March 31, 2007.

The ~~1987~~expected ~~Stock~~term ~~Option~~of ~~Plan (~~the ~~1987~~options ~~Plan)~~ was ~~established~~estimated tousing ~~cover~~historical ~~key~~option ~~employees,~~exercise ~~officers~~data. ~~and~~The ~~directors~~expected ofvolatility ~~Tanox.~~was ~~Under~~based on the ~~terms~~Company’s ofhistorical ~~the~~stock ~~1987~~price ~~Plan,~~volatility. ~~as amended,~~The ~~the~~risk-free ~~number~~interest ofrate ~~shares~~was ofbased ~~common~~on the ~~stock~~U.S. ~~eligible~~Treasury ~~for~~zero-coupon ~~issuance~~issues ~~was~~with ~~4,320,000.~~a ~~Options~~remaining ~~issued~~term ~~under~~equal to the ~~1987~~expected ~~Plan~~term ~~were~~of ~~generally~~the ~~granted~~option. atThe Company assumed a ~~purchase~~zero ~~price~~percent ~~equal~~dividend toyield. Under FAS 123R, the fair ~~market~~ value atof ~~the~~stock ~~date~~options ofgranted ~~grant,~~is ~~generally~~recognized ~~expired~~as ~~ten~~expense ~~years~~over ~~after~~the service ~~date~~period, net of ~~grant~~estimated ~~and~~forfeitures. ~~were~~Based ~~generally~~on ~~completely~~historical ~~exercisable~~data, ~~five~~the ~~years~~Company ~~after~~calculated ~~the~~an ~~grant~~estimated ~~date.~~forfeiture ~~At March 31~~rate, ~~2006,~~which ~~options~~it believes is a reasonable assumption to ~~purchase~~estimate ~~280,800~~forfeitures. ~~shares~~To ofthe ~~common~~extent ~~stock~~actual ~~were~~forfeitures ~~outstanding~~differ ~~under~~from ~~the~~our ~~1987~~current estimates, ~~Plan.~~cumulative ~~The~~adjustments ~~1987~~to ~~Plan~~share-based ~~expired~~compensation expense would have be recorded in ~~1997~~the period that estimates are revised.

The 1997 Stock Plan (the 1997 Plan) was established to grant options to purchase up to 8,000,000 shares of common stock to employees, directors, advisors and consultants. The 1997 Plan provides for several types of grants including incentive stock options, non-qualified stock options, stock appreciation rights, stock awards, stock purchases and performance units. Incentive stock options provide the right to purchase common stock at a price not less than 100% of the fair value of common stock on the date of the grant. Non-qualified stock options provide the right to purchase common stock at a price not less than 50% of the fair value of the common stock on the date of the grant. The options granted under the 1997 Plan generally expire ten years after date of grant and are generally completely exercisable five years after the grant date. At March 31, ~~2006~~2007, ~~options~~the toCompany ~~purchase 2,392,388~~has ~~shares of common stock were outstanding under~~ the ~~1997~~following ~~Plan,~~share-based ~~and~~compensation ~~5,024,271~~plans: ~~shares were available for future grants. The 1997 Plan will expire in 2007.~~

The ~~1992~~1987 ~~Non-Employee Directors~~ Stock ~~Options~~Option Plan (the ~~1992~~1987 ~~Directors~~ Plan) was established to ~~grant~~cover ~~options~~key toemployees, ~~purchase~~officers upand todirectors ~~480~~of Tanox. Under the terms of the 1987 Plan,~~000~~ as amended, the number of shares of common stock toeligible ~~non-employee~~for ~~directors~~issuance ofwas ~~the Company~~4,320,000. Options ~~granted~~ issued under the ~~1992~~1987 ~~Directors~~ Plan were generally ~~vested~~granted ~~one-third~~at a ~~annually~~purchase ~~from~~price equal to the fair market value at the date of grant, ~~and~~ generally expired ten years ~~from~~after ~~the~~ date of grant. ~~The~~and ~~exercise~~were ~~price~~generally ofcompletely ~~the~~exercisable ~~options~~five ~~granted~~years ~~was~~after ~~determined~~the bygrant ~~a committee appointed by Tanox’s board of directors~~date. At March 31, ~~2006~~2007, options to purchase 224,000 shares of common stock were outstanding under the ~~1992~~1987 ~~Directors~~ Plan. The ~~1992~~1987 ~~Directors~~ Plan expired in ~~2002~~1997.

The 1997 Stock Plan (the ~~Board,~~1997 anPlan) ~~option~~was established to ~~acquire~~grant 20options to purchase up to 8,000,000 shares of common stock to employees, directors, advisors and consultants. ~~Following~~The ~~each~~1997 ~~annual~~Plan ~~meeting~~provides offor ~~stockholders~~several attypes ~~which~~of ~~directors~~grants ~~are~~including ~~elected,~~incentive ~~the~~stock options, non-~~employee directors~~qualified ~~continuing~~stock inoptions, ~~office~~stock ~~receive~~appreciation rights, stock awards, stock purchases and performance units. Incentive stock options provide the right to ~~acquire~~purchase ~~10,000~~common ~~shares~~stock at a price not less than 100% of the fair value of common stock. ~~New~~on ~~directors~~the ~~who~~date ~~received~~of ~~their~~the ~~initial~~grant. ~~option~~Non-qualified ~~grant~~stock ~~within~~options ~~six~~provide ~~months~~the ~~prior~~right to ~~the~~purchase ~~first~~common ~~annual~~stock ~~meeting~~at a ~~after~~price ~~their~~not ~~appointment~~less ~~would~~than ~~not~~50% beof ~~eligible~~the ~~for~~fair ~~an option~~value ~~following~~of ~~such~~the ~~meeting~~common stock on the date of the grant. ~~All~~The ~~grants~~options granted under the ~~2000~~1997 ~~Directors~~ Plan ~~have~~generally aexpire ~~term~~ten years after date of ~~ten~~grant. ~~years,~~Options ~~are~~granted ~~issued~~under atthe ~~fair~~1997 ~~market~~Plan ~~value~~prior ~~and~~to ~~vest~~February ~~1/36 per~~2004 ~~month~~are generally ~~from~~completely exercisable five years after the grant date, ofwhile ~~grant~~options ~~over~~granted ~~three~~in February 2004 and after are generally completely exercisable four years after the grant date. At March 31, ~~2006~~2007, options to purchase ~~198~~ 1,~~200~~995,758 shares of common stock were outstanding under the ~~2000~~1997 ~~Directors~~ Plan, and ~~301~~4,~~800~~995,467 shares were available for future grants. The 1997 Plan will expire on October 31, 2007. Under the terms of the pending merger with Genentech, any future issuance of stock options requires approval by Genentech.

The 1992 Non-Employee Directors Stock Option Plan (the 1992 Directors Plan) was established to grant ~~following~~options ~~table~~to ~~summarizes~~purchase up to 480,000 shares of common stock ~~option~~to ~~activity~~non-employee ~~for~~directors of the ~~three~~Company. ~~months~~Options ~~ended~~granted under the 1992 Directors Plan generally vested one-third annually from the date of grant and generally expired ten years from the date of grant. The exercise price of the options granted was determined by a committee appointed by Tanox’s board of directors. At March 31, ~~2006:~~2007, options to purchase 17,500 shares of common stock were outstanding under the 1992 Directors Plan. The 1992 Directors Plan expired in 2002.

	Number ofShares		WeightedAverageExercisePrice		WeightedAverageRemainingContractualLife	AggregateIntrinsic Value(In 000s)
Outstanding, December 31, 2005	2,401,309		$	14.84
Granted	632,115			18.65
Exercised	(57,314	)		12.14
Expired	(2,594	)		13.30
Forfeited	(80,128	)		12.54
Outstanding, March 31, 2006	2,893,388			15.79	7.30	$	14,819
Exercisable, March 31, 2006	1,262,658		$	16.60	5.14	$	7,683

The 2000 Non-Employee Directors’ Stock Option Plan (the 2000 Directors Plan) was established to grant options to purchase up to 500,000 shares of common stock to non-employee directors of the Company. Under the terms of the 2000 Directors Plan, as amended, non-employee directors receive, upon initial election to the Board, an option to acquire 20,000 shares of common stock. Following each annual meeting of stockholders at which directors are elected, the non-employee directors continuing in office receive options to acquire 10,000 shares of common stock. New directors who received their initial option grant within six months prior to the first annual meeting after their appointment would not be eligible for an option following such meeting. All grants under the 2000 Directors Plan have a term of ten years, are issued at fair market value and vest 1/36 per month from the date of grant over three years, in the case of the 20,000-share options, or immediately, in the case of the 10,000-share options. At March 31, 2007, options to purchase 234,900 shares of common stock were outstanding under the 2000 Directors Plan, and 247,800 shares were available for future grants. Under the terms of the pending merger with Genentech, any future issuance of stock options requires approval by Genentech.

The following table summarizes ~~nonvested~~ stock option activity for the three months ended March 31, ~~2006~~2007:

	Number ofShares		WeightedAverageExercisePrice	~~WeightedAverage FairValue~~		WeightedAverageRemainingContractualLife	AggregateIntrinsic Value(In 000s)
Nonvested, December 31, 2005	1,267,224			$	7.27
Outstanding, December 31, 2006	2,430,400		$	16.88
Granted	~~632,115~~—			—	~~12.34~~
Vested	(188,481	)			7.01
Exercised	178,242		$	12.69
Forfeited	(80,128	)			7.11
Cancelled	—			—
Nonvested, March 31, 2006	1,630,730			$	9.28
Forfeited	—			—
Outstanding, March 31, 2007	2,252,158		$	17.21		7.1	$	7,961
Exercisable, March 31, 2007	2,235,033		$	17.21		7.0	$	7,928

7. Commitments and Contingencies

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

The following table summarizes nonvested stock option activity for the three months ended March 31, 2007:


	Number of Shares		Weighted Average Fair Value
Nonvested, December 31, 2006	1,362,879		$	9.63
Granted	—			—
Vested	(1,345,754	)		9.62
Forfeited	—			—

Nonvested, March 31, 2007	17,125		$	9.83

6. Commitments and Contingencies

Tanox had been engaged in litigation in connection with a fee dispute with the law firms that represented the Company in litigation with Genentech relating to, among other things, the intellectual property rights surrounding the development of anti-IgE technology. An arbitration panel issued an award entitling the attorneys to receive (1) approximately $3.5 million, including interest, (2) payments ranging from 33-1/3% to 40% of the future milestone payments, in excess of the first $1 million, Tanox would receive from Genentech following product approval and (3) 10% of the royalties that Tanox would receive on sales of certain anti-IgE products, including Xolair. The 10% of royalties received by Tanox is required to be paid to the attorneys within 30 days of the end of the calendar quarter in which the royalty payments are received by Tanox. At March 31, 2007, Tanox had an accrued liability of $2.5 million with respect to amounts that would be payable to the attorneys on royalties received or receivable by Tanox on net sales of Xolair. On April 2, 2007, the Harris County District Court heard the former attorneys’ (Akin Gump, Hauer & Feld, LLP, Robinson Law Firm, Williams, Birnberg & Anderson, LLP, Michael Madigan, Michael J. Mueller, Kenneth M. Robinson and Gerald M. Birnberg) Motion for Remand to the Arbitration Panel claiming: (i) that certain net profit interests payable by Novartis on sales of anti-IgE products in the U.S. fall within the award; and (ii) that they are entitled to additional fees related to certain manufacturing payments made to Tanox and the forgiveness by Novartis of certain debt owed by Tanox. The Court denied the Motion for Remand and suggested that the parties file Motions for Summary Judgment on the merits. On April 27, 2007, Tanox filed with the Court its Motion to Enforce Final Judgment and/or Motion for Summary Judgment. On May 3, 2007, the former attorneys filed a Motion for Reconsideration of Order Denying Motion for Remand and Motion to Compel Further Arbitration.

On December 5, 2006, a purported class action petition was filed in the District Court of Harris County, Texas in connection with the proposed acquisition of Tanox by Genentech. The petition (captioned Superior Partners v. Nancy T. Chang, Julia Brown, Heinz W. Bull, Tse-Wen Chang, Gary Frashier, Osama Mikhail, Peter G. Traber, Danong Chen, Tanox, Inc., Genentech, Inc. and Green Acquisition Corporation, Case No. 2006-77015) names Tanox and the current members of the Tanox board of directors as defendants. The petition also names Genentech and Green Acquisition Corporation as defendants. Among other things, the petition alleges that Tanox’s directors, in approving the proposed merger, breached fiduciary duties owed to Tanox stockholders, and that Genentech and Green Acquisition Corporation aided and abetted those alleged breaches of fiduciary duty. The petition also alleges that the preliminary proxy statement Tanox filed in connection with the merger on November 24, 2006 contains false or misleading statements or omissions. On December 19, 2006, Plaintiff amended the petition to allege that the definitive proxy statement, filed by Tanox on December 7, 2006, contains false and misleading statements or omissions. The amended petition seeks class certification, damages and certain forms of equitable relief, including enjoining the consummation of the merger. Tanox and the other defendants believe the amended petition is without merit and intend to defend themselves vigorously.

7. Income Taxes

In the first quarter of 2007, the Company recorded $145,000 of income tax expense for estimated Alternative Minimum Tax. There was no provision for income taxes in the first quarter of 2006 due to a pre-tax loss of $5.2 million.

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

Overview

The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and the related notes thereto included in this Quarterly Report on Form 10-Q. The discussion and analysis contains 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 (Exchange Act). These forward-looking statements are based on our current expectations and entail various risks and uncertainties. Our actual results could differ materially from those projected in the forward-looking statements as a result of various factors, including those set forth in Part I Item 1A, “Risk Factors” of the Company’s 2006 Form 10-K.

Tanox discovers and develops therapeutic monoclonal antibodies to address significant unmet medical needs in the areas of immune-mediated diseases, infectious disease, inflammation and cancer. Our products are genetically engineered antibodies that target a specific molecule or antigen.

~~Marketed~~On ~~Product~~November 9, 2006, we entered into an agreement and plan of merger with Genentech and Green Acquisition Corporation, a wholly-owned ~~Xolair~~subsidiary of Genentech, pursuant to which Genentech would acquire Tanox for approximately $919 million in cash. Under the terms of the agreement, Green Acquisition will merge with and into Tanox, and the stockholders of Tanox will receive $20.00 in cash for each share held, less any applicable withholding tax. In addition, each option to purchase Tanox common stock outstanding at the time of the merger will be canceled and the option holder entitled to receive a cash amount equal to the product of (i) the number of shares of Tanox common stock as to which the option remains unexercised, multiplied by (ii) the amount, if any, by which $20.00 exceeds the exercise price of the option, less any applicable withholding tax. The boards of directors of both companies and the stockholders of Tanox have approved the transaction, which remains subject to expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act and the satisfaction of other customary closing conditions. On January 29, 2007, we and Genentech announced that we had received a Request for Additional Information and Documentary Materials, commonly referred to as a “second request,” from the FTC in connection with the proposed acquisition, which extends the waiting period. We and Genentech continue to work with the FTC, and we now expect that the transaction will close within the third quarter of 2007, subject to expiration of the waiting period and the satisfaction of other customary closing conditions, including the absence of any material adverse effect having occurred in respect of Tanox.

~~Xolair~~Marketed ~~was developed in collaboration with Genentech, Inc. (Genentech) and Novartis Pharma AG (Novartis). In the U.S.,~~ Product—Xolair is labeled for treatment of adults and adolescents (12 years of age and above) with moderate-to-severe persistent asthma who have a positive skin test or in vitro reactivity to a perennial aeroallergen and whose symptoms are inadequately controlled with inhaled corticosteroids. Xolair was approved for use in the U.S. by the FDA in June 2003 and approved for use in the European Union in October 2005.

~~Under~~Xolair ~~our~~was ~~collaboration~~developed ~~agreements~~in collaboration with Genentech and Novartis. In the U.S., weXolair ~~receive~~is ~~royalties~~labeled onfor ~~the~~treatment ~~net~~of ~~sales~~adults and adolescents (12 years of ~~Xolair~~age and above) with moderate-to-severe persistent asthma who have a positive skin test or in vitro reactivity to a perennial aeroallergen and ~~share~~whose symptoms are inadequately controlled with inhaled corticosteroids. In Europe, Xolair is licensed as add-on therapy to improve asthma control in ~~Novartis’~~adults ~~net~~and ~~profits~~adolescents ~~from~~(12 ~~sales~~years of age and above) with severe persistent allergic asthma. Xolair was approved for use in the U.S. Inby the ~~first~~Food ~~quarter~~and ofDrug ~~2006,~~Administration we(FDA) ~~recorded~~in ~~net~~June ~~royalty~~2003 ~~revenue~~and ofapproved ~~$8.8~~for use ~~million~~in ~~from~~Europe ~~sales~~in ofOctober ~~Xolair~~2005. ~~versus~~On ~~$5.9~~February 21, ~~million for~~2007, the ~~first~~FDA ~~quarter~~proposed ofthat ~~2005.~~Genentech Inadd a boxed warning to the ~~first~~Xolair ~~quarter~~label ofbased ~~2006,~~on weupdated ~~recorded~~safety ~~net~~data ~~profit~~Genentech ~~sharing~~provided regarding some reported cases of $1anaphylaxis during post marketing surveillance.0 ~~million~~Genentech ~~from~~and Novartis ~~related~~are toin discussions with the ~~fourth~~FDA ~~quarter~~to ofupdate ~~2005,~~the aslanguage in the ~~profit-sharing~~prescribing ~~calculation~~information isand ~~one~~are ~~quarter~~developing ina ~~arrears~~Risk Mitigation Action Plan (Risk Map) to help ensure patient safety.

Under our collaboration agreements with Genentech and Novartis, we receive royalties on the ~~terms~~net sales of Xolair and share in Novartis’ net profits from sales of Xolair in the ~~Tripartite~~U.S. ~~Collaboration~~For ~~Agreement~~the ~~(TCA)~~three ~~between~~months ~~Tanox~~ended March 31, ~~Genentech~~2007, ~~and~~we ~~Novartis~~recorded net royalty revenue of $11.0 million from sales of Xolair versus $8.8 million for the three months ended March 31, 2006. Tanox ~~relinquished~~recorded ~~any~~net ~~rights~~profit sharing torevenue ~~manufacture Xolair~~of ~~and~~$2.7 inmillion ~~exchange~~for ~~receives~~the ~~payments~~three ~~based~~months onended March 31, 2007, compared to $1.0 million for the ~~quantity~~three ofmonths ~~Xolair~~ended ~~produced~~March 31, 2006. ~~Manufacturing-~~Tanox also receives manufacturing rights revenue isfrom Genentech and Novartis based on the quantity of Xolair produced, as defined in our collaboration agreement. For the ~~previous~~three ~~quarter~~months ended March 31, as2007, ~~the~~Tanox ~~calculation~~recorded ismanufacturing ~~one~~rights ~~quarter~~revenue inof ~~arrears~~$2.9 million. Under the formula in the collaboration ~~agreements~~agreement, no amounts were recognized ~~due~~by to Tanox for manufacturing-rights revenue ~~from~~for the ~~fourth~~three months ended March 31, 2006. Profit sharing and manufacturing-rights revenue is calculated and recognized one quarter ofin ~~2005~~arrears.

As10 of March 31, 2006, Xolair was approved in 42 countries. Clinical trials are ongoing to study the long-term safety profile of Xolair. Novartis is also conducting a Phase 3 clinical trial to study the effectiveness of Xolair in pediatric allergic asthma patients. A Phase 2 study of Xolair in patients with severe peanut allergy was discontinued by Genentech, Novartis and Tanox in January 2006 after pre-study oral food challenges resulted in severe hypersensitivity in two individuals. The decision to discontinue the trial was not related to the safety of Xolair. Neither of the patients had received Xolair, as they had not been enrolled in the study. Genentech, Novartis and Tanox are working with food-allergy experts and patient advocacy groups to determine a path forward before discussing alternative plans with the FDA.

Clinical Development Programs

We have three products in clinical development.

TNX-355

TNX-355 is our monoclonal antibody in development to treat HIV/AIDS. On April 25, 2006, we reported positive 48-week results from the Phase 2 clinical trial of TNX-355. The results showed that TNX-355, when given in combination with an optimized background regimen (OBR) of other antiviral therapies, produce a considerably greater reduction in viral load in HIV-infected patients than did placebo in combination with OBR. This reduction of the level of HIV in the bloodstream was demonstrated in both TNX-355 dosing groups studied in the trial (10 milligrams-per-kilogram and 15 mg/kg). The 48-week results also showed that patients who received TNX-355 plus OBR experienced a statistically significant increase in CD4-positive cells compared to those taking the placebo plus OBR.

These results, together with positive 24-week data reported in October 2005, demonstrate the long-term antiviral and immunologic impact of TNX-355. At both the 24-week and 48-week time points, TNX-355 was

~~well~~Clinical ~~tolerated,~~Development ~~with~~Programs no serious adverse events related to the drug. Subject to the outcome of an end-of-Phase 2 meeting with the FDA, we will continue to evaluate options for further development of TNX-355. We anticipate that the end-of-Phase 2 meeting with the FDA will take place in the first half of 2006.

~~TNX-832~~We have two products in clinical development.

~~TNX-832~~Ibalizumab ~~is an anti-tissue factor chimeric antibody for the treatment of acute lung injury~~ (~~ALI)~~formerly ~~and acute respiratory distress syndrome (ARDS). We are conducting a Phase 1/2 trial with~~ TNX-~~832~~355) designed to evaluate the safety and pharmacokinetics of the antibody. The trial is a single-blinded, dose-escalating, placebo-controlled trial. Patient enrollment in the trial continued throughout the first quarter of 2006.

Ibalizumab (TNX-355) is our monoclonal antibody in development to treat HIV/AIDS. In May 2006, we reported positive 48-week results from the Phase 2 clinical trial of ibalizumab. The results showed that ibalizumab, when given in combination with an optimized background regimen (OBR) of other antiviral therapies, produced a greater reduction in viral load in HIV-infected patients than did placebo in combination with OBR. These results, together with positive 24-week data reported in October 2005, demonstrate the long-term antiviral activity of ibalizumab. At both the 24-week and 48-week time points, ibalizumab was well tolerated, with no serious adverse events related to the drug as assessed by study investigators.

We have continued to discuss the development of ibalizumab with the FDA. A Phase 2b dose-finding trial has been designed that will evaluate four different dosages in HIV treatment-experienced patients. The Agency has indicated that, if successful, the dose-finding trial could be considered pivotal for registration of ibalizumab. We are in the process of preparing for the initiation of the ibalizumab Phase 2b clinical trial.

TNX-650

TNX-650 is a humanized ~~antibody~~anti-IL-13 ~~being developed as a potential treatment of Hodgkin’s lymphoma~~antibody. ~~Patient~~A ~~enrollment of a multi-dose, dose-escalation~~ Phase 1 clinical trial ~~designed~~was toinitiated ~~determine the safety, tolerability, and pharmacokinetics of the agent is expected to begin~~ in ~~the second~~May ~~quarter of~~ 2006, ~~with initial results~~ to ~~determine~~evaluate ~~the maximum-tolerated dose anticipated in the first half of 2007.~~ TNX-650 ~~targets~~as ~~Interleukin~~a ~~13,~~potential antreatment ~~important growth factor for malignant~~ of Hodgkin’s lymphoma ~~cells.~~in Inpatients ~~preclinical testing,~~who ~~TNX-650~~are ~~inhibited~~refractory ~~the~~to ~~function~~chemotherapy ofor ~~IL13,~~radiation ~~and~~treatment. ~~blocked~~Six ~~the~~cohorts ~~proliferation~~have ofbeen ~~malignant~~enrolled ~~cells~~to date.

We have completed enrollment of a Phase 1 clinical trial of TNX-650 as a potential treatment for moderate-to-severe asthma. The trial is a randomized, double-blind, placebo-controlled, dose-escalation study of the safety, tolerability and pharmacokinetics of single doses of TNX-650 in healthy volunteers. Preclinical studies indicate that IL-13 is a key mediator of asthma responses, including airway inflammation, obstruction and hyper-reactivity.

Preclinical Programs

TNX-~~650~~234, isa ~~also~~humanized antibody, is being ~~evaluated~~developed as a potential treatment for anwet ~~inflammatory~~and/or ~~disease~~advanced ~~indication~~dry ~~for~~age-related ~~which~~macular wedegeneration ~~intend~~(AMD). toIn ~~file~~addition, anwe ~~IND~~have ~~later~~generated ~~this year. TNX-833,~~ a ~~tissue~~humanized ~~factor~~high ~~antagonist~~affinity ~~humanized~~anti-IgE antibody, isfor ~~being~~the ~~evaluated as a~~ potential treatment ~~for~~of ~~cancer.~~allergic ~~TNX-234~~diseases, aand development ~~humanized~~activities ~~antibody,~~are isongoing ~~being~~with ~~developed~~Novartis asunder aour ~~potential~~two-party ~~treatment~~Amended ~~for~~and ~~wet~~Restated ~~age-related~~Development ~~macular~~and ~~degeneration~~Licensing ~~(AMD)~~Agreement. ~~TNX-717,~~Development ~~a humanized~~agreements ~~antibody,~~revenue isfor ~~being~~the ~~developed~~three asmonths aended ~~potential~~March 31, ~~treatment~~2007 ~~for~~includes ~~osteoporosis~~$2.0 ~~TNX-558,~~million earned as reimbursement by Novartis of a ~~humanized~~portion ~~antibody,~~of isour ~~being~~development ~~evaluated~~costs asfor athis ~~potential~~high ~~inflammatory~~affinity anti-~~disease~~IgE ~~therapy~~program.

Manufacturing and Other Programs

Re-commissioning activities at our manufacturing facility in San Diego, California have been completed. Our manufacturing efforts are now focused on developing capabilities for Good Manufacturing Practices (GMP) production of our products in clinical development.

Critical Accounting Policies

Use of Estimates

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

Revenue Recognition

Under our collaboration agreements with Genentech and Novartis, we receive a royalty on the net sales of Xolair worldwide and share in Novartis’ net profits from Xolair sales in the U.S. Royalty revenue is recorded monthly based on contractual terms and information provided by Genentech and Novartis. Royalties are reconciled and adjusted if actual results differ from those previously reported to us and are subject to audit by Tanox. Profit sharing is calculated and recorded one quarter in arrears. Manufacturing rights revenue represents amounts received from Genentech and Novartis in consideration of our relinquishment, under the collaboration agreements, of our rights to manufacture Xolair. Manufacturing rights revenue is based on the quantity of Xolair produced and is calculated and recorded one quarter in arrears. Revenues from development agreements

include payments for milestone achievements and sponsored research and development costs. Milestone payments are received under best efforts contracts and are not refundable. They are recognized as revenue when the milestones are achieved and there are no remaining performance obligations. Revenues for sponsored research and development are recognized as revenue as we complete our obligations related to such activities. Any revenue contingent upon future performance is deferred and recognized as the performance is completed. Revenues recognized are net of certain credits and amounts due to our former attorneys under an arbitration award.

Research and Development

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

Stock-based Compensation

Tanox adopted FAS 123R, “Share-Based Payment.” on January 1, 2006 using the modified prospective transition method, that requires that stock-based compensation is recognized for all awards granted, modified or settled after the effective date as well as for all awards granted to employees prior to the effective date that remain unvested as of the effective date. Prior to the adoption of FAS 123R, we accounted for our stock-based compensation expense under the recognition and measurement provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees, and Related Interpretations.” Under the intrinsic value method described in APB Opinion No. 25, no compensation expense was recognized if the exercise price of the employee stock option equaled the market price of the underlying stock on the date of grant.

Tanox estimates the fair value of stock options using the Black-Scholes-Merton option pricing model. The assumptions used under this model are as follows: 1) the expected term of the options is estimated using historical option exercise data; 2) the expected volatility is estimated based on historical stock price volatility; 3) the risk-free interest rate is based on the U.S. Treasury zero-coupon issues with a remaining term equal to the expected term of the option; and 4) a zero percent dividend yield. Under FAS 123R, the fair value of stock options granted is recognized as expense over the service period, net of estimated forfeitures, which we base on historical data. To the extent actual forfeitures differ from our current estimates, cumulative adjustments to stock-based compensation expense will be recorded in the period estimates are revised.

~~Results~~Revenue ofRecognition ~~Operations~~

~~This~~Under ~~discussion~~our ofcollaboration ~~our~~agreements ~~Results~~with Genentech and Novartis, we receive a royalty on the net sales of ~~Operations~~Xolair ~~contains~~worldwide ~~forward-looking~~and ~~statements~~share ~~regarding~~in Novartis’ net profits from Xolair sales in the U.S. Royalty revenue is recorded monthly based on contractual terms and information provided by Genentech and Novartis. Royalties are reconciled and adjusted if actual results differ from those previously reported to us and are subject to audit by Tanox. Our interest in Novartis’ U.S. net profits is calculated and recognized one quarter in arrears. Manufacturing rights revenue represents amounts received from Genentech and Novartis in consideration of our ~~products~~relinquishment, under the collaboration agreements, of our rights to manufacture Xolair. Manufacturing rights revenue is based on the quantity of Xolair produced, ~~research~~as defined in our collaboration agreement, and is calculated and recognized one quarter in arrears. Revenues from development ~~expense~~agreements include payments for milestone achievements and ~~general~~sponsored research and ~~administrative~~development ~~expense~~costs. ~~For~~Milestone apayments ~~discussion~~are ofreceived under best efforts contracts and are not refundable. They are recognized as revenue when the ~~risks~~milestones are achieved and there are no remaining performance obligations. Revenues for sponsored research and ~~uncertainties~~development ~~associated~~are ~~with~~recognized as revenue as we complete our ~~forward~~obligations ~~looking~~related ~~projections,~~to ~~please~~such ~~see~~activities. ~~the~~Any ~~“Risk~~revenue ~~Factors”~~contingent ~~section~~upon infuture ~~our~~performance ~~Form~~is ~~10-K~~deferred ~~for~~and recognized as the ~~year~~performance ~~ended~~is ~~December 31~~completed. Revenues recognized are net of certain credits and reserves, ~~2005~~and amounts due to our former attorneys under an arbitration award.

~~Three~~Research ~~Months Ended March 31, 2006~~ and ~~2005~~Development

~~Revenues.~~Research ~~For~~and ~~the~~development ~~three~~expenses ~~months~~consist ~~ended~~of direct costs and indirect overhead costs, ~~March 31~~including facilities costs, ~~2006~~salaries, related benefit costs and ~~2005~~material and supply costs. Expenses may also include upfront fees and milestones paid to licensors and collaborative partners. Such amounts are expensed as incurred. Research and development costs also include estimates for clinical trial costs, ~~revenues~~which ~~consist~~are ofbased ~~the~~on ~~following:~~patient enrollment and clinical trial progress. Actual costs may differ from estimates.

	Three months ended March 31,
(in thousands)	2006		2005
Royalties, net	$	8,537	$	5,875
Royalties from related party, net		214		34
Profit share from related party, net		1,043		—
Development agreements, license fees and manufacturing rights		11		10
Development agreements from related party		10		9
Total Revenues	$	9,815	$	5,928

Share-based Compensation

~~Revenues~~Tanox ~~for~~adopted ~~the~~FAS ~~first~~123R, ~~quarter~~“Share-Based ofPayment” on January 1, 2006 ~~were~~using ~~$9.8~~the ~~million~~modified ~~compared~~prospective totransition ~~revenues~~method, ofwhich ~~$5.9~~requires ~~million~~that share-based compensation is recognized for ~~the~~ ~~first~~all ~~quarter~~awards ofgranted, ~~2005.~~modified ~~Revenues~~or ~~are~~settled ~~recorded~~after ~~net~~the ofeffective ~~credits~~date ~~and~~as ~~amounts~~well ~~payable~~as for all awards granted to ~~our~~employees prior ~~former~~to ~~attorneys~~the ~~under~~effective andate ~~arbitration~~that ~~award~~remain unvested as of the effective date.

~~Net~~Tanox ~~royalty~~estimated ~~revenue~~the ~~increased~~fair $2value of stock options using the Black-Scholes-Merton option pricing model.9 ~~million~~The ~~for~~assumptions used under this model are as follows: 1) the ~~first~~expected ~~quarter~~term of ~~2006~~the tooptions $8is estimated using historical option exercise data; 2) the expected volatility is estimated based on historical stock price volatility; 3) the risk-free interest rate is based on the U.8S. ~~million,~~Treasury ~~compared~~zero-coupon issues with a remaining term equal to $5the expected term of the option; and 4) a zero percent dividend yield.9 ~~million~~Under ~~for~~FAS 123R, the ~~first~~fair ~~quarter~~value of ~~2005,~~stock options granted is recognized as aexpense ~~result~~over the service period, net of ~~increased~~estimated ~~Xolair~~forfeitures, ~~sales~~which we base on historical data. To the extent actual forfeitures differed from our current estimates, cumulative adjustments to share-based compensation expense would have been recorded in the period that estimates are revised.

InUnder ~~addition~~the toterms ~~Xolair~~of ~~royalty~~the ~~revenue,~~employee ~~Tanox~~and ~~recorded~~director ~~Xolair~~stock option ~~net~~agreements, ~~profit-sharing~~the ~~revenue~~shareholder approval of ~~$1.0~~the ~~million~~merger ~~for~~agreement ~~the~~with ~~first~~Genentech ~~quarter~~on ofJanuary 15, ~~2006.~~2007, ~~The~~was ~~profit-sharing revenue~~considered ~~represented~~a ~~Tanox’s~~change ~~share~~in ofcontrol ~~Novartis’~~which ~~U.S.~~resulted ~~net~~in ~~profits~~all ~~from~~employee ~~sales~~and ofdirector ~~Xolair~~options inoutstanding becoming fully vested. For the ~~fourth~~three months ~~quarter~~ended ofMarch 31, ~~2005~~2007, aswe ~~the~~recorded ~~profit~~approximately $7.4 million of share-~~sharing~~based ~~calculation~~compensation isexpense, ~~one~~of ~~quarter~~which inapproximately ~~arrears~~$6.6 million was due to the accelerated vesting of options.

~~Tanox~~New ~~receives~~Accounting ~~manufacturing~~Pronouncement rights revenue from Genentech and Novartis in consideration for Tanox’s relinquishment in 2004 of any rights it had to manufacture Xolair. Manufacturing-rights revenue is based on the quantity of Xolair produced in the previous quarter, as the calculation is one quarter in arrears. Under the formula in the collaboration agreements, no amounts were due to Tanox for manufacturing-rights revenue from the fourth quarter of 2005.

~~Development~~The ~~agreement~~Company adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48, ~~license~~“Accounting ~~fees~~for ~~and~~Uncertainty ~~manufacturing~~in ~~rights~~Income ~~revenue~~Taxes – an Interpretation of FASB Statement No. 109,” (FIN 48) on January 1, 2007. This interpretation clarifies the accounting for uncertainty in ~~2006~~income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement 109, “Accounting for Income Taxes.” The interpretation prescribes a ~~also~~recognition ~~includes~~threshold ~~reimbursement~~and ~~from~~measurement ~~Genentech~~attribute for a tax position taken or expected to be taken in a tax return and ~~Novartis~~provides ofguidance ~~selected~~on ~~clinical~~derecognition, ~~trial~~classification, ~~costs~~interest ~~incurred~~and penalties, accounting for ~~TNX-901~~interim periods, disclosure and transition.

Research and Development Expense. Research and development expense consists of costs incurred for product development and discovery research programs. Research and development expense consists of direct costs and indirect overhead costs, including facilities costs, clinical trial costs, salaries, related benefit costs and material and supply costs. At March 31, 2006, our research and development clinical stage programs include TNX-355 for HIV/AIDS, TNX-832 for ALI/ARDS and TNX-650 for Hodgkin’s lymphoma. Research and preclinical stage programs include TNX-650 for inflammatory disease, TNX-234 for AMD, TNX-833 for cancer, TNX-717 for osteoporosis and bone fracture, TNX-558 for inflammatory disease and other discovery and exploratory research projects. For the three months ended March 31, 2006 and 2005, costs associated with research and development programs, including allocated overhead, were:

	Three months ended March 31,
(in thousands)	2006		2005
Clinical stage programs	$	9,794	$	9,235
Research and preclinical stage programs		4,167		2,505
Total research and development expense	$	13,961	$	11,740

~~Research~~The ~~and~~Company ~~development~~is ~~expense~~not ~~increased~~subject ~~$2.2~~to ~~million~~federal, ~~for~~state, ~~the~~local ~~first~~or ~~quarter~~non-US ofincome ~~2006~~tax ~~compared~~examinations toby ~~the~~tax authorities ~~first~~for ~~quarter~~any ofyears ~~2005~~before 1986. ~~The~~There ~~increase~~have inbeen ~~research~~no ~~and~~extensions ~~development~~of ~~costs for~~ the ~~first~~statute ~~quarter~~ of this year was attributed primarily to expenses associated with manufacturing activities in preparation for planned clinical trials, increased spending for preclinical programs and employee stock-based compensation expenselimitations.

~~Acquired~~The ~~in-process~~adoption of FIN 48 did not have a material impact on our financial position. Tanox has an estimated research and development (R&D) tax carryforward of $6.5 ~~The~~million as of December 31, 2006 and March 31, 2007. Due to limited documentation to substantiate the R&D tax credit, it is uncertain that this tax position would be sustained upon examination by a taxing authority. Therefore, as of January 1, 2007, the Company had approximately $136.75 million of uncertain tax benefits that, if recognized, would impact our tax expense ~~for~~calculation. ~~acquired~~It ~~in-process~~is ~~research~~expected ~~and~~that ~~development~~the ~~recorded~~amount of uncertain tax benefits could change in the ~~first~~next ~~quarter~~12 ofmonths; ~~2005~~however, ~~relates~~we do not expect the change to have a significant impact on the results of operations or financial position of the Company’s. The ~~acquisition~~Company does not expect the total uncertain tax benefit to significantly change due to the settlement of aaudits, ~~tissue~~expiration ~~factor~~of ~~antagonist~~statutes ~~program~~or ~~from~~other ~~Sunol~~events prior to March 31, 2008.

~~General~~The ~~and~~Company’s ~~Administrative~~policy ~~Expense.~~is ~~For~~to ~~the~~classify ~~first~~interest ~~quarter of 2006 general~~ and ~~administrative~~penalties ~~expense~~on ~~was~~uncertain ~~$2.8~~tax ~~million,~~benefits ~~compared~~in toincome $1taxes.9 ~~million for~~We believe the ~~first~~uncertain ~~quarter~~tax ofbenefits ~~2005.~~related to ~~The increase in general and administrative costs for~~ the ~~first~~R&D ~~quarter~~tax ofcredit ~~this~~carryforward ~~year~~would ~~was~~result ~~due~~in ~~primarily~~no ~~to expenses~~ related topenalty ~~business-development~~or ~~activities~~interest ~~and~~expense ~~employee~~if ~~stock-based compensation expense~~recognized.

~~Other~~Results ~~Income (Expense). For the first quarter~~ of ~~2006,~~Operations other income was $1.8 million, compared to $1.0 for the first quarter of 2005. The increase in other income for the first quarter of this year was attributed primarily to a rise in interest income in 2006 resulting from higher average interest rates on investments.

~~Income~~Three ~~Taxes.~~Months WeEnded ~~have~~March 31, ~~not~~2007 ~~recorded~~and ~~an income tax provision because of a projected net loss for the year~~ 2006.

~~Stock-Based Compensation~~Revenues. ~~We adopted FAS 123R on January 1, 2006. Prior to the adoption, we disclosed such expenses on a pro forma basis in the notes to our financial statements.~~ For the three months ended March 31, ~~2006,~~2007 ~~we recorded approximately $693,000 of stock-based compensation expense, of which $332,000 was included in research~~ and development expense and $361,000 was included in general and administrative expense. The adoption of FAS 123R had the impact of an increase of $0.02 per share on our net loss per share for the three months ended March 31, 2006~~. Stock-based compensation for all non-vested options outstanding as of March 31~~, ~~2006~~revenues isconsist ~~$9.7 million, which will be recognized over a weighted-average period~~ of ~~1.63 years. Tanox amortizes stock-based compensation expense on a straight-line basis over~~ the ~~expected~~following: ~~life of the vesting period. (See Note 6 “Stock-Based Compensation” in our Notes to Condensed Consolidated Financial Statements.)~~

Net Income (Loss). For the first quarter of 2006, we recorded a net loss of $5.2 million, or $0.12 per share, compared to a net loss of $20.5 million, or $0.46 per share, for the first quarter of 2005. The results for the first quarter of 2006 reflect the Company’s January 1, 2006 adoption of Statement of Financial Accounting Standards No. 123R. The net loss for the first quarter of 2005 included a $13.7 million expense for acquired in-process research and development related to the Company’s acquisition of a tissue factor antagonist program from Sunol Molecular Corporation.


	Three months ended March 31,
(in thousands)	2007		2006
Royalties, net	$	9,962	$	8,537
Royalties from related party, net		1,031		214
Profit share from related party, net		2,665		1,043
Development agreements, license fees and manufacturing rights		2,945		11
Development agreements from related party		1,970		10

Total revenues	$	18,573	$	9,815

Revenues for the first quarter of 2007 were $18.6 million compared to revenues of $9.8 million for the first quarter of 2006. Revenues are recorded net of credits and reserves, and amounts payable to our former attorneys under an arbitration award.

Net royalty revenue increased $2.2 million for the first quarter of 2007 to $11.0 million, compared to $8.8 million for the first quarter of 2006, as a result of increased Xolair sales.

In addition to Xolair royalty revenue, Tanox recorded Xolair net profit sharing revenue of $2.7 million for the first quarter of 2007 compared to $1.0 million for the first quarter of 2006. Tanox also recorded manufacturing rights revenue of $2.9 million for the first quarter of 2007 in consideration for Tanox’s relinquishment in 2004 of any rights it had to manufacture Xolair. Manufacturing rights revenue is based on the quantity of Xolair produced, as defined in our collaboration agreement. Under the formula in the collaboration agreement, no amounts were recognized by Tanox for manufacturing-rights revenue for the three months ended March 31, 2006. Profit sharing and manufacturing-rights revenue is calculated and recognized one quarter in arrears.

~~Liquidity~~Development ~~and~~agreements ~~Capital~~revenue ~~Resources~~for the three months ended March 31, 2007 includes $2.0 million earned as reimbursement from Novartis of a portion of Tanox’s development costs for a high affinity anti-IgE program.

WeResearch ~~have~~and Development ~~financed~~Expense. ~~our~~Research ~~operations~~and ~~since~~development ~~inception~~expense ~~primarily~~consists ~~through~~of ~~sales~~costs ofincurred ~~equity~~for ~~securities,~~product development and ~~licensing~~discovery ~~fee~~research ~~revenues,~~programs. ~~interest~~Research ~~income,~~and ~~equipment~~development ~~financing~~expenses ~~agreements~~consist of direct costs and, ~~beginning~~indirect inoverhead ~~2003~~costs, ~~revenues~~including facilities ~~from~~costs, ~~our~~salaries, ~~Xolair~~related ~~collaboration.~~benefit ~~During~~costs ~~the~~and ~~year~~material ~~ended~~and ~~December~~supply costs. At March 31, ~~2000~~2007, weour ~~sold~~research ~~approximately~~and ~~8.6 million~~development ~~shares~~clinical ofstage ~~common~~programs ~~stock~~include inIbalizumab anfor ~~initial~~HIV/AIDS, ~~public~~TNX-650 ~~offering~~ for ~~net~~Hodgkin’s ~~proceeds~~lymphoma ofand ~~$225.8~~TNX-650 ~~million~~for Asthma. AsResearch and ofpreclinical ~~March 31,~~stage ~~2006~~programs include TNX-234 for AMD, wea ~~had~~high ~~$171~~affinity anti-IgE program and other discovery and exploratory research projects.~~9 million~~ inFor ~~cash,~~the ~~cash~~three ~~equivalents~~months ended March 31, 2007 and ~~investments~~2006, ofcosts ~~which~~associated ~~$166.6~~with ~~million~~these ~~was~~research ~~classified~~and development asprograms, ~~current~~including ~~assets.~~allocated overhead, were:

Cash, cash equivalents and investments increased by $7.4 million for the three months ended March 31, 2006 to $171.9 million from $164.5 million at December 31, 2005. The net increase in funds was attributed primarily to the receipt of a one-time net milestone payment of $12.8 million based on Xolair achieving sales of more than $300 million for the first time, and Xolair royalty and profit share revenue received, partially offset by the funding of operating activities.


	Three months ended March 31,
(in thousands)	2007		2006
Clinical stage programs	$	10,497	$	9,794
Research and preclinical stage programs		3,873		4,167

Total research and development expense	$	14,370	$	13,961

~~Net~~Research ~~cash~~and ~~provided~~development byexpense ~~operating~~increased ~~activities was~~ $~~7.7~~409,000 ~~million~~ for the ~~three~~first ~~months~~quarter ~~ended~~of ~~March 31,~~2007 ~~2006~~ compared to ~~net cash used in operating activities of $8.6 million for~~ the same period in ~~2005~~2006. The ~~2006~~ increase in ~~cash~~research ~~was~~and ~~due~~development ~~primarily~~costs tofor the ~~receipt~~first ofquarter ~~a one-time net Xolair milestone payment~~ of ~~$12.8~~this ~~million,~~year ~~partially~~was ~~offset~~attributed byprimarily ato ~~net~~employee ~~loss~~share-based ofcompensation ~~$5.2~~expense ~~million.~~as ~~The net cash used in 2005 was comprised mainly of~~ a ~~net~~result ~~loss~~ of ~~$20.5~~the ~~million,~~accelerated anvesting ~~increase in receivables and other assets~~ of ~~$2.8 million~~options, partially offset by ~~the~~lower clinical ~~acquisition~~trial ofexpenses ~~in-process research~~ and ~~development~~preclinical ~~of $13~~activities.7 ~~million related to the Sunol transaction.~~

~~Net~~General ~~cash~~and ~~provided~~Administrative ~~by investing activities was $11~~Expense.4 ~~million~~For ~~for~~ the ~~three~~first ~~months~~quarter ~~ended~~of ~~March 31~~2007, ~~2006~~general ~~compared to $10.4 million for~~and ~~the~~administrative ~~same~~expense ~~period~~was ~~in 2005. In 2006, investments decreased by~~ $125.48 million, ~~as maturities increased over purchases,~~ compared to ~~a decrease of~~ $212.58 million for ~~the~~ same period in ~~2005~~2006. InThe ~~2005,~~increase ~~$6.0~~in ~~million~~general ofand ~~cash~~administrative ~~was~~costs ~~paid~~ for ~~acquired~~the ~~in-process research~~first ~~and~~quarter ~~development~~of ~~and~~this ~~$5.6~~year ~~million~~ was ~~paid~~due primarily to ~~purchase~~employee ~~manufacturing~~share-based ~~assets~~compensation ~~from~~expense ~~Biogen~~as ~~Idec~~a result of the accelerated vesting of options.

Other Income, Net. ~~cash~~For ~~provided~~the byfirst ~~financing activities~~quarter ~~was~~of ~~$685~~2007,~~000~~ ~~for~~other ~~the~~income ~~three~~was ~~months~~$2.3 ~~ended March 31~~million, ~~2006~~ compared to $~~273,000~~1.8 million for the same period in ~~2005~~2006. The increase in ~~cash~~other income for the first quarter of this year was attributed primarily to a rise in interest income resulting from ~~stock~~higher ~~option~~average ~~exercises~~interest rates on investments.

~~Tanox~~Income ~~and~~Tax aExpense. ~~third~~In ~~party manufacturer began discussions in~~ the ~~fourth~~first quarter of ~~2004~~2007, ~~related to revisions to a manufacturing and supply agreement because~~ we ~~determined~~recorded ~~that~~$145,000 weof ~~would~~income ~~produce~~tax ~~TNX-355~~expense for ~~Phase~~estimated 3Alternative ~~clinical~~Minimum ~~trials in the newly-leased San Diego manufacturing facility~~Tax. InThere ~~February 2005, a letter agreement with the third party manufacturer~~ was ~~reached to suspend all provisions of the~~no ~~manufacturing~~provision ~~and supply agreement~~ for aincome ~~period~~taxes toin bethe ~~determined~~first byquarter ~~us,~~of ~~but~~2006 ~~not~~due to ~~exceed~~a 30pre-tax ~~months.~~loss ~~Under the terms~~ of ~~the letter agreement, Tanox has paid a total of~~ $15.72 million~~, $1~~.4 million of which may be credited against future work performed by the third party manufacturer, subject to certain limitations. We have the option to resume production of TNX-355 under the manufacturing and supply agreement on or before August 30, 2007.

~~Our~~Share-Based ~~current~~Compensation. ~~and~~We ~~anticipated~~adopted FAS ~~development~~123R ~~projects~~on ~~require~~January 1, ~~substantial additional capital to complete~~2006. WeFor dothe ~~not~~three ~~expect~~months toended ~~generate~~March 31, ~~positive~~2007, ~~cash~~the ~~flow~~Company ~~from operations~~recorded ~~until~~approximately at$7.4 ~~least~~million ~~2007~~of ~~because~~share-based wecompensation ~~anticipate~~expense, ~~that~~including the ~~amount~~accelerated vesting of ~~cash~~options, weof ~~need~~which to$3.7 ~~fund~~million ~~operations,~~was ~~including~~included in research and development, ~~manufacturing~~expense and ~~other~~$3.7 ~~costs,~~million ~~and~~was ~~for~~included ~~capital~~in ~~expenditures,~~general ~~will~~and ~~increase~~administrative inexpense. Under the ~~future~~terms asof ~~our~~employee ~~projects move~~and ~~from~~director ~~research~~stock tooption ~~clinical~~agreements, ~~development~~the toshareholder ~~commercialization.~~approval Weof ~~may~~the ~~make~~merger ~~additional~~agreement ~~acquisitions~~between ofthe ~~businesses~~Company, Genentech orand ~~intellectual~~Green ~~property~~Acquisition ~~assets~~Corporation, ~~and~~a ~~also~~wholly-owned ~~expect~~subsidiary ~~that~~of weGenentech ~~will~~on ~~need~~January 15, to2007, ~~expand~~was ~~our~~considered ~~clinical~~a ~~development,~~change ~~manufacturing~~in ~~capacity~~control, ~~facilities,~~ ~~business~~which ~~development~~resulted in all employee and ~~marketing~~director ~~activities~~options tooutstanding ~~support~~under the ~~future~~option ~~development~~agreements becoming fully vested on the date of ~~our~~the ~~programs~~approval. ~~Based~~For onthe ~~cash~~three ~~projections,~~months weended ~~expect~~March 31, ~~that~~2006, ~~cash~~the onCompany ~~hand~~recorded ~~and~~approximately ~~revenue~~$693,000 ~~from~~of ~~operations~~stock-based ~~will~~compensation beexpense, ~~sufficient~~of towhich ~~fund~~$332,000 ~~our~~was ~~existing~~included ~~operations~~in ~~for the~~research ~~next~~and ~~four~~development ~~years.~~expense ~~However~~and $361,000 ~~our~~was ~~future~~included ~~capital~~in ~~needs~~general ~~will~~and ~~depend~~administrative onexpense. ~~many~~The ~~factors,~~adoption ~~including~~of ~~the~~FAS ~~continued~~123R ~~successful~~and ~~commercialization~~the ofaccelerated ~~Xolair,~~vesting ~~availability~~ of ~~financing~~options ~~for~~resulted ~~clinical~~in ~~trials~~a ~~through~~decrease ~~collaboration~~in orearnings ~~joint~~of ~~venture~~$0.16 ~~arrangements, progress~~per inshare ~~our~~for ~~research~~the ~~and~~three ~~product~~months ~~development~~ended ~~activities~~March 31, ~~the~~2007 ~~size~~ and ~~design~~an increase of $0.02 ~~our~~per ~~clinical~~share ~~trials,~~of ~~commercialization~~the ~~activities,~~Company’s ~~the~~net ~~costs~~loss ~~and~~per ~~magnitude~~share offor ~~product~~the orthree ~~technology~~months ~~acquisitions~~ended March 31, ~~the~~2006. ~~cost~~The adoption of ~~preparing,~~FAS ~~filing,~~123R ~~prosecuting, maintaining~~had ~~and~~no ~~enforcing~~impact ~~patent~~on ~~claims~~cash ~~and~~flow ~~other~~from ~~intellectual~~operations ~~property~~and ~~rights,~~cash ~~competing~~flow ~~technological~~from ~~and~~financing ~~market~~activities ~~developments,~~for ~~changes~~the inthree ormonths ~~terminations~~ ended March 31, 2007.

ofNet ~~existing~~Income ~~collaboration~~(Loss). ~~and~~For ~~licensing~~the ~~arrangements~~first quarter of 2007, ~~establishing~~we ~~additional~~recorded ~~collaboration~~net ~~and~~income ~~licensing~~of ~~arrangements~~$531,000, ~~potential~~or ~~merger~~$0.01 ~~and acquisition~~per ~~activities~~share, ~~potential~~compared ~~litigation~~to ~~surrounding~~a ~~any~~net loss of ~~the~~$5.2 ~~foregoing~~million, ~~and~~or ~~manufacturing~~$0.12 ~~scale-up~~per ~~costs~~share, ~~and~~for ~~marketing~~the ~~activities,~~first ifquarter weof ~~undertake~~2006. ~~those~~The ~~activities.~~results ~~Consequently,~~for wethe ~~may~~first ~~need~~quarter toof ~~raise~~2007 ~~additional~~reflect ~~funds~~increased ~~and~~revenue, wepartially ~~may~~offset ~~issue~~by ~~additional~~an ~~shares~~increase ofin employee share-based compensation expense as a ~~common~~result ~~stock~~of orthe ~~other~~accelerated ~~equity~~vesting ~~securities~~of stock options.

WeLiquidity ~~filed a universal shelf Registration Statement with the Securities~~ and ~~Exchange~~Capital ~~Commission (SEC)~~Resources in May 2005, which would permit us to sell up to $100 million of equity or debt securities in one or more offerings. We expect to use the net proceeds from sales of securities under this shelf registration statement to provide funds for development of products in our drug development pipeline, potential product acquisition or licensing opportunities and general corporate purposes. The terms of any offering of securities will be made public in a subsequent filing with the SEC at the time of any such sale.

We have financed our operations since inception primarily through sales of equity securities, development and licensing fee revenues, interest income and, beginning in 2003, revenues from our Xolair collaboration. During the year ended December 31, 2000, we sold approximately 8.6 million shares of common stock in an initial public offering for net proceeds of $225.8 million. As of March 31, 2007, we had $194.2 million in cash, cash equivalents and investments, of which $169.5 million was classified as current assets.

Cash, cash equivalents and investments increased by $9.1 million for the three months ended March 31, 2007 to $194.2 million from $185.1 million at December 31, 2006. The net increase in funds was attributed primarily to Xolair royalty, profit sharing and manufacturing rights revenue received, partially offset by the funding of operating activities.

Net cash provided by operating activities was $7.1 million for the three months ended March 31, 2007 compared to $7.7 million for the same period in 2006. The increase in cash during the 2007 period was due primarily to a net income of $531,000 adjusted by $7.4 million of non cash compensation expense related primarily to the accelerated vesting of stock options. The increase in cash during the 2006 period was due primarily to the receipt of the one-time Xolair net milestone payment of $12.8 million, partially offset by a net loss of $5.2 million.

Net cash provided by investing activities was $3.6 million for the three months ended March 31, 2007 compared to $11.4 million for the same period in 2006. In 2007, investments decreased by $3.6 million, as maturities increased over purchases, compared to a decrease of $12.4 million for the same period in 2006.

Net cash provided by financing activities was $2.2 million for the three months ended March 31, 2007 compared to $685,000 for the same period in 2006. The increase in cash was due to stock option exercises.

Our current and anticipated development projects require substantial additional capital to complete. Although we generated positive cash flow from operations in the first quarter of 2007, we anticipate that if the merger agreement is not completed the amount of cash we need to fund operations, including research and development, manufacturing and other costs, and for capital expenditures, will increase in the future as our projects move from research to clinical development to commercialization. We may make additional acquisitions of businesses or intellectual property assets and also expect that we will need to expand our clinical development, manufacturing capacity, facilities, business development and marketing activities to support the future development of our programs. Based on cash projections, we expect that cash on hand and revenue from operations will be sufficient to fund our existing operations for at least the next four years. However, our future capital needs will depend on many factors, including the continued successful commercialization of Xolair, progress in our research and product development activities, the size and design of our clinical trials, commercialization activities, the costs and magnitude of product or technology acquisitions, the cost of preparing, filing, prosecuting, maintaining and enforcing patent claims and other intellectual property rights, competing technological and market developments, changes in or terminations of existing collaboration and licensing arrangements, establishing additional collaboration and licensing arrangements, potential merger and acquisition activities, potential litigation surrounding any of the foregoing, and manufacturing scale-up costs and marketing activities, if we undertake those activities. Consequently, we may need to raise additional funds and we may issue additional shares of common stock or other equity securities.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Foreign Currency Exchange Rates. We are subject to foreign currency exchange risk because we conduct minimal operations through one foreign subsidiary in China.

Interest Rate Risk. Cash, cash equivalents and investments were approximately $~~171~~194.92 million at March 31, ~~2006~~2007. These assets were primarily invested in investment grade corporate bonds, commercial paper, government agency securities and money market funds with maturities of less than three years, which we have the ability and intent to hold to maturity. We also invest in auction securities which are classified as available for sale securities. We do not invest in derivative securities. Although our portfolio and related interest income is subject to fluctuations in interest rates and market conditions, no gain or loss on any security would actually be recognized in earnings unless we sell the asset.

Item 4. Controls and Procedures

Our management evaluated, with the participation of our Chief Executive Officer and Vice President of Finance, ~~have evaluated~~ the effectiveness of ~~Tanox’s~~our disclosure controls and procedures as of ~~March 31,~~the ~~2006~~end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and ~~Vice~~our Vice President of Finance have concluded that ~~Tanox’s~~our disclosure controls and procedures (as defined in ~~Securities Exchange Act of 1934 (~~the “Exchange Act”) Rules 13a-15(e) and 15d-15(e)) are effective asto ofensure that information we are required to disclose in reports that we file or submit under the ~~end~~Exchange ofAct is recorded, processed, summarized and reported within the ~~period~~time ~~covered~~periods byspecified ~~this~~in ~~report~~SEC rules and forms.

There ~~were~~ was no ~~changes~~change in our internal control over financial reporting that occurred during the ~~quarter~~period ~~ended~~covered ~~March 31,~~by ~~2006~~this Quarterly Report on Form 10-Q that ~~have~~has materially affected, or ~~are~~is reasonably likely to materially affect, ~~Tanox’s~~our internal control over financial reporting.

1516

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

~~From~~On ~~time~~December 5, to2006, ~~time~~a ~~Tanox~~purported isclass aaction ~~defendant~~petition was filed in ~~lawsuits~~the District ~~incidental~~Court toof ~~its~~Harris ~~business~~County, Texas in connection with the proposed acquisition of Tanox by Genentech. ~~Management~~The petition (captioned Superior Partners v. Nancy T. Chang, Julia Brown, Heinz W. Bull, Tse-Wen Chang, Gary Frashier, Osama Mikhail, Peter G. ~~believes~~Traber, Danong Chen, Tanox, Inc., Genentech, Inc. and Green Acquisition Corporation, Case No. 2006-77015) names Tanox and the current members of our board of directors as defendants. The petition also names Genentech and Green Acquisition Corporation as defendants. Among other things, the petition alleges that our directors, in approving the ~~outcome~~proposed merger, breached fiduciary duties owed to our stockholders, and that Genentech and Green Acquisition Corporation aided and abetted those alleged breaches of ~~any~~fiduciary ~~existing~~duty. ~~lawsuits~~The ~~will~~petition ~~not~~also bealleges ~~material~~that the preliminary proxy statement Tanox filed in connection with the merger on November 24, 2006 contains false or misleading statements or omissions. On December 19, 2006, Plaintiff amended the petition to allege that the definitive proxy statement, filed by Tanox’s ~~financial~~on December 7, 2006, contains false and misleading statements or omissions. The amended petition seeks class certification, damages and certain forms of equitable relief, including enjoining the consummation of the merger. Tanox and the other defendants believe the amended petition is without merit and intend to defend themselves vigorously.

We were engaged in a legal proceeding in connection with a fee dispute with the law firms that represented us in litigation with Genentech during the ~~ITEM~~mid-1990s relating to, among other things, the intellectual property rights surrounding the development of anti-IgE technology. In 1999, an arbitration panel issued an award entitling the attorneys to receive (1) 1Aapproximately $3.5 ~~Risk~~million, including ~~Factors~~interest, (2) payments ranging from 33-1/3% to 40% of the future milestone payments, in excess of the first $1 million, we would receive from Genentech following product approval, and (3) 10% of the royalties that we would receive on all sales of certain anti-IgE products, including Xolair. The arbitrators’ award was reduced to a final judgment in the 11th District Court of Harris County, Texas, on March 28, 2000. On April 2, 2007, the Harris County District Court heard the former attorneys’ (Akin Gump, Hauer & Feld, LLP, Robinson Law Firm, Williams, Birnberg & Anderson, LLP, Michael Madigan, Michael J. Mueller, Kenneth M. Robinson and Gerald M. Birnberg) Motion for Remand to the Arbitration Panel claiming: (i) that certain net profit interests payable by Novartis on sales of anti-IgE products in the U.S. fall within the award; and (ii) that they are entitled to additional fees related to certain manufacturing payments made to Tanox and the forgiveness by Novartis of certain debt owed by Tanox. The Court denied the Motion for Remand and suggested that the parties file Motions for Summary Judgment on the merits. On April 27, 2007, Tanox filed with the Court its Motion to Enforce Final Judgment and/or Motion for Summary Judgment. On May 3, 2007, the former attorneys filed a Motion for Reconsideration of Order Denying Motion for Remand and Motion to Compel Further Arbitration.

~~There are no material changes from the risk factors set forth in~~ ~~Part I,~~ Item 1A,. “Risk Factors,” ~~of the Company’s 2005 10-K. Please refer to that section for disclosures regarding the risks and uncertainties related to the Company’s business.~~

Please refer to Part I, Item 1A, “Risk Factors” of the Company’s 2006 Form 10-K. for disclosures regarding the risks and uncertainties related to the Company’s business.

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

On January 15, 2007, we held a special meeting of stockholders for the purpose of voting to adopt the Agreement and Plan of Merger dated as of November 9, 2006, by and among Tanox, Inc., Genentech, Inc. and a wholly owned subsidiary of Genentech.

The adoption of the merger agreement was approved as follows:


Number of Votes For:		34,236,400
Number of Votes Against:		7,716
Number of Votes Abstained:		700
Broker Non-Votes:		—

Item 6. Exhibits

(a)

Exhibits.

10.1		Third Amendment to the 2000 Non-employee Directors’ Stock Option Plan.
31.1		Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.1		Certification of Chief Executive Officer pursuant to Section 13a-14(a) and Rule 15d-14(a) of the Securities Act, as amended.
31.2		Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Vice President of Finance Pursuant to Section 13a-14(a) and Rule 15d-14(a) of the Securities Act, as amended.
32		Certification of Principal Executive Officer and Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32		Certification of Chief Executive Officer and Chief Financial Officer Furnished Pursuant to 18 U.S.C. Section 1350, pursuant to the requirements of Section 906 of the Sarbanes-Oxley Act of 2002.

1618

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly ~~caused~~ caused this ~~report~~Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.

	TANOX, INC.
Date: May 3, 2006	By:	Danong Chen
Date: May 10, 2007	By:	/s/ Danong Chen
		Danong Chen
		Danong Chen President and Chief Executive Officer
		President and Chief Executive Officer
Date: May 10, 2007	By:	/s/ Gregory P. Guidroz
Date: May 3, 2006	By:	Gregory P. Guidroz
		Gregory P. Guidroz Vice President of Finance
		Gregory P. Guidroz
		Vice President of Finance

1719

EXHIBIT INDEX


Exhibit Number		Description of Document
31.1		Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32		Certification of Principal Executive Officer and Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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Filing Compare · TANOX INC