UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K/A

(Mark One)

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

For the fiscal year ended December 31, 2003

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 0-22147

ILEX ONCOLOGY, INC.

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		74-2699185 (I.R.S. Employer Identification No.)

4545 Horizon Hill Blvd. San Antonio, Texas (Address of principal executive offices)		78229 (Zip Code)

Registrant’s telephone number, including area code: (210) 949-8200

Securities Registered Pursuant to Section 12(b) of the Act: None

Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)

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

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

Indicate by check mark if the issuer is an accelerated filer (as defined in Exchange Act rule 12b-2). Yes [X] No [ ].

The aggregate market value of the common stock held by non-affiliates of the Registrant as of June 30, 2003 was approximately $612,625,521 based on the closing price of $19.38 for such date reported on the Nasdaq National Stock Market.

The number of shares outstanding of the Registrant’s common stock as of February 19, 2004 is 39,061,379.

TABLE OF CONTENTS


PART II
	ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 8. FINANCIAL STATEMENTS AND SCHEDULES
PART IV
	ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Signatures
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Consent of Ernst & Young LLP
Certification of President and CEO - Section 302
Certification of VP and CFO - Section 302
Certification of President and CEO - Section 906
Certification of VP and CFO - Section 906

ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K/A

INTRODUCTORY NOTE

The Company is filing this amendment to our Annual Report on Form 10-K for the year ended December 31, 2003, originally filed with the Securities and Exchange Commission on March 12, 2004, in response to comments received from the Securities and Exchange Commission.

This Form 10-K/A contains the following changes to the disclosures contained in the Company’s Form 10-K filed on March 12, 2004:

•		Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Net Loss – This paragraph has been amended to delete the non-GAAP net loss information originally included after the first sentence.

•		Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations – December 31, 2003 and 2002 – Operating Expenses – Research and Development Costs – Additional disclosure regarding our major research and development projects has been added.

•		Part II, Item 8. Financial Statements and Supplementary Data – Note 2 Significant Accounting Policies – Revenue Recognition – Product Profit and Royalty – Additional disclosure regarding what events must occur before product profit and royalty revenue resulting from CAMPATH sales are recognized has been added.

•		Part II, Item 8. Financial Statements and Supplementary Data – Note 2 Significant Accounting Policies – Intangible Assets and Goodwill – Additional disclosure required by SFAS 142 has been added to the last two sentences of the first paragraph and the last sentence of the second paragraph.

•		Part IV — Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K — (c) Exhibits – The following required Exhibits are filed as part of this Annual Report on Form 10-K/A:


•	23.1	Consent of Ernst & Young LLP

•	31.1	Certification of President and Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

•	31.2	Certification of Senior Vice President and Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

•	32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

•	32.2	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Except as set forth herein, no other information included in our Annual Report on Form 10-K is amended by this Form 10-K/A. The filing of this Form 10-K/A shall not be deemed an admission that the Annual Report on Form 10-K, when filed, knowingly included any untrue statement of a material fact or omitted to state a material fact necessary to make a statement not misleading.

Other than those items mentioned above, this Form 10-K/A does not reflect events occurring after March 12, 2004, the date of filing of the Form 10-K, or otherwise modify or update any of the information or disclosures contained therein in any way.

ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K/A

PART II.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion is included to describe our financial position and results of operations for each of the previous three years in the period ended December 31, 2003. The Consolidated Financial Statements and notes thereto contain detailed information that should be referred to in conjunction with this discussion.

GENERAL

On February 26, 2004, we entered into a definitive merger agreement with Genzyme. Under the terms of the Merger Agreement, each outstanding share of ILEX common stock, $0.01 par value per share, will be converted into the right to receive a fraction of a share (the “Exchange Ratio”) of Genzyme common stock. The Exchange Ratio will be calculated by dividing $26.00 by the average per share closing price of Genzyme common stock (the “Genzyme Share Price”) as reported by the NASDAQ National Market over the twenty trading days ending on the fifth trading day prior to the closing date of the Mergers, except that if the Genzyme Share Price is greater than $59.88, the Exchange Ratio will be 0.4342, and if the Genzyme Share Price is less than $46.58, the Exchange Ratio will be 0.5582. In addition, each outstanding option to purchase ILEX common stock will be converted into an option to purchase the number of shares of Genzyme common stock equal to the number of shares of ILEX common stock subject to such option multiplied by the Exchange Ratio, and the associated exercise price will be adjusted accordingly. Until the closing date, which is anticipated to occur in mid-2004, we will continue to operate independently of Genzyme. The closing of the transaction is contingent upon approval by certain regulatory authorities including the U.S. Federal Trade Commission and our shareholders.

We are a product-driven biopharmaceutical company focused on developing and commercializing a portfolio of novel therapeutic treatments primarily in oncology. We have leveraged our core competencies in clinical drug development to identify, develop and commercialize our proprietary product candidates. Our lead product is marketed in the United States as CAMPATH ^® and in Europe and other countries as MABCAMPATH ^® for the treatment of patients with B-cell chronic lymphocytic leukemia (CLL) who have been treated with alkylating agents and who have failed fludarabine therapy. CLL is a type of blood cancer characterized by progressive accumulation of B-lymphocytes, a type of immune system cell formed in the bone marrow. In addition to CAMPATH, we have product candidates in clinical trials, principally addressing oncology, as well as several active preclinical and drug discovery programs. Our pipeline comprises product candidates at various stages of clinical development, including monoclonal antibodies, agents that have toxic effects on certain cells (cytotoxic agents) or inhibit cellular growth (cytostatic agents) with novel mechanisms of action, agents that inhibit the formation of new blood vessels (angiogenesis inhibitors) and agents which block cellular messaging associated with cancer growth and metastasis (signal transduction inhibitors).

We have incurred losses since inception and had an accumulated deficit through December 31, 2003 of $345.5 million. Our losses have resulted primarily from research and product development activities, including licensing of products and product and corporate acquisitions for which we incur in-process research and development charges and administrative expenses. We plan to continue to invest in key research and development activities. We expect to continue to incur operating losses throughout 2004. Our revenue for the foreseeable future will be limited to our product profit and royalty revenue, product development revenue, interest income and other miscellaneous income.

Currently the revenues recorded in product profit and royalty revenue consist of our profit share from net U.S. sales of CAMPATH and royalty revenue from the rest of the world sales. Participation from our CAMPATH distributor, Schering AG, for services performed and costs incurred in connection with the development of CAMPATH are recorded as product development revenues. The development of CAMPATH is ongoing for B-cell chronic lymphocytic leukemia (CLL), multiple sclerosis (MS), non-Hodgkins lymphoma (NHL) and solid organ transplantation.

Prior to January 1, 2002, we accounted for CAMPATH activities as follows:

•		our operating revenue included product development revenue we received from the ILEX Pharmaceuticals, L.P., formerly known as Millennium & ILEX Partners, L.P. (the Partnership);

•		our research and development expenses included all of the development costs for CAMPATH, which were largely offset by the revenue we received from the Partnership;

ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K/A

•

our portion of the profits resulting from CAMPATH sales and the other revenues and expenses of the Partnership was recorded in equity in income (loss) of joint venture.

In December 2003 and in connection with our co-development agreement, we paid Bioenvision $3.5 million for the exclusive U.S. and Canadian sublicense for clofarabine in oncology. Under the terms of the agreement, an additional $4.0 million, due in two payments, is triggered upon completing the submission of the New Drug Application (NDA).

On August 4, 2003, we completed an underwritten public offering of our common stock, pursuant to which we sold 5.5 million shares. In addition, the Cancer Therapy and Research Center Endowment, an ILEX shareholder, offered and sold 500,000 shares of our common stock. Proceeds, net of costs to us, from this offering were approximately $87.4 million. The net proceeds from this offering have been and will continue to be used to fund clinical trials of our lead product candidates; for clinical and preclinical studies for our other product candidates; for potential licenses and acquisitions of other businesses or complementary products and technologies; and for working capital, capital expenditures and other general corporate purposes.

On October 29, 2001, we announced that we had entered into a definitive Purchase and Sale agreement (Purchase Agreement) to purchase Millennium Pharmaceuticals, Inc.’s (Millennium’s) 50% equity interest in the Partnership. The acquisition closed on December 31, 2001. We estimated the purchase price at $127.6 million based on the net present value of the required future cash payments discounted at 6.5%, our estimated incremental borrowing rate on the date of purchase. The terms of the agreement required an initial cash payment of $20.0 million and an additional $120.0 million in scheduled payments over the following three years. As of December 31, 2003, $40.0 million remains due to Millennium. At our option, $10.0 million of this remainder may be paid in our common stock. We anticipate $20.0 million of the maturities will be paid in the second or third quarter of 2004 with the remaining $20.0 million to be paid on December 31, 2004. In addition, Millennium will be entitled to royalties based upon net U.S. CAMPATH sales above specified levels beginning in 2005.

In February 2001, we acquired Symphar, now known as ILEX Oncology Research Sarl, and its research platform in medicinal chemistry and nuclear receptor biology, which has led to drug candidates in several therapeutic fields, including cardiovascular and bone disease. The Symphar acquisition, combined with our preclinical signal transduction and angiogenesis inhibition programs in Boston, gives us the capability to translate early-stage research leads into clinical drug development programs. Under the terms of the agreement, we acquired Symphar for $28.9 million, including $15.0 million in cash and 521,121 shares of our common stock.

CRITICAL ACCOUNTING POLICIES

We believe that our most critical accounting issues include our policy for the recognition of revenue from outlicensing agreements, the valuation and impairment review of the intangible assets acquired in connection with the purchase of Millennium’s interest in the Partnership and the process of determining the amount of in-process research and development obtained in an acquisition.

Outlicensing revenue is earned and recognized based on the performance requirements of the respective outlicensing agreements. Non-refundable license fees for which no further performance obligations exist, and no continuing involvement by us is required, are recognized on the earlier of when the payments are received or when collection is assured. Revenue from non-refundable license fees where we continue involvement through development collaboration or have an obligation to supply product is recognized ratably over the applicable development period or patent life.

Revenue associated with performance milestones is recognized based upon the achievement of the milestones, as defined in the respective agreements. Revenue under research and development cost reimbursement contracts is recognized as the related costs are incurred. Advance payments received in excess of amounts earned are classified as deferred revenue until earned.

The amount recorded as completed technology and the amount recorded as trademark within our other intangible assets were determined based on an independent appraisal of the estimated timing and amount of revenue to be generated from sales of CAMPATH. Additionally, we perform a test at least annually to determine that the amounts recorded as intangible assets are recoverable. Amounts recorded as in-process research and development are based upon assumptions and estimates regarding the amount and timing of projected revenues and costs as well as the appropriate discount rates and expected trends in technology. No assurance can be given, however, that the underlying assumptions used to estimate revenue, development costs or profitability or the events associated with such projects will transpire as estimated. For these reasons, actual results may vary from projected results. The most significant and uncertain assumptions relating to the in-process projects involve the projected timing of completion and revenues attributable to each project.

ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K/A

The following discussion addresses our consolidated results of operations for 2003, 2002 and 2001, our liquidity and capital resources and contractual obligations. It should be read in conjunction with our Financial Statements, the Notes thereto and other financial information beginning on page F-1 of this report.

RESULTS OF OPERATIONS — DECEMBER 31, 2003 AND 2002

Operating Revenues

Product Profit and Royalty Revenue. Product profit and royalty revenue, which is our share of CAMPATH net profits on U.S. sales and a royalty on the rest of the world sales, totaled $23.3 million in 2003 compared to $10.8 million in 2002. The increase of $12.5 million in product profit and royalty revenue is due to an increase in global net sales of CAMPATH. Global net sales of CAMPATH, recorded by Schering AG and Berlex, were $71.7 million in 2003 compared to $44.1 million in 2002.

Product Development Revenue. Product development revenue represents Schering AG’s contribution to research and development expenses. Revenue from product development decreased to $6.3 million through December 31, 2003 from $9.8 million through December 31, 2002, a decrease of $3.5 million or 36%. Product development revenue decreased primarily because the advance balance from Schering AG was depleted in the first quarter of 2003.

Outlicensing Revenue. Outlicensing revenue increased to $2.8 million in 2003 from $0.6 million in 2002, an increase of $2.2 million. In 2003, our outlicensing revenue consisted primarily of a $2.5 million payment received from QuatRx, which was recognized as revenue in the third quarter. The revenues generated related to the granting of an exclusive worldwide license to certain lipid-focused research platforms.

Contract Research Services Revenue. Revenue from our fee-for-service CRO business decreased to $1.8 million in 2003 from $9.4 million in 2002. The decrease of $7.6 million, or 81%, in our CRO revenues is consistent with our plan to transition out of the fee-for-service CRO business.

Operating Expenses

Research and Development Costs. Research and development costs increased to $49.0 million in 2003, from $46.9 million in 2002. This increase of $2.1 million, or 4%, was due to increased development spending on our product pipeline, specifically CAMPATH and ILX-651, which was partially offset by a decrease in other research and development program spending and reductions in salary and facility-related operating expenses.

The following table summarizes our major research and development projects, including the costs incurred in each of the years ended December 31, 2003, 2002, 2001, total research and development costs incurred to date and the estimated completion dates for each project in development. The information contained in the column labeled “Estimated Completion Date” is our estimate of the timing to complete only the current in-process development phases. The actual timing to complete the phases may differ materially from these estimates.

ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K/A


	Research and Development									Estimated
	Expenses for the Year Ended									completion Date
	December 31,						Research and Development		Current Phases of	of our in-process Phase of
Product	2003		2002		2001		Expenses to Date		Development	Development
					(in millions)
Direct costs⁽¹⁾:
CAMPATH⁽²⁾	$	16.1	$	7.7	$	4.3	$	38.6	I - III		2004 - 2007
Clofarabine⁽³⁾		7.8		9.4		1.6		18.8	I and II		2004 - 2006
ILX-651⁽⁴⁾		2.7		1.3		7.1		11.3	II		2005-2006
MUC1⁽⁵⁾		1.6		0.9		0.2		2.7	Preclinical		2005
Other products⁽⁶⁾		4.9		7.3		7.7		35.3	Preclinical, Phase I and II		2005
Other operating costs⁽⁷⁾		15.9		20.3		12.9		83.0

Total research and development costs		49.0		46.9		33.8		189.7
Licensing costs		8.4		5.7		10.3		29.3
Total project costs	$	57.4	$	52.6	$	44.1	$	219.0

(1)		The major components of the direct costs include various clinical expenses, consulting expenses, other third-party costs, salaries and employee benefits, supplies and materials.

(2)		CAMPATH is a humanized monoclonal antibody that binds to a specific target, CD52, on cell surfaces leading the body’s immune system to destroy malignant, or cancerous, cells. CAMPATH is still in the early stages of commercialization. It is approved for use in patients with B-cell chronic lymphocytic leukemia who have been treated with alkylating agents and who have failed fludarabine therapy. We are now conducting a Phase III post-approval study, Phase I/II trials in non-Hodgkin’s lymphoma, Phase II trials in multiple sclerosis and a Phase III study with CAMPATH used in conjunction with fludarabine. Although we are conducting other CAMPATH studies, the research and development costs included in the table above associated with CAMPATH primarily relate to the aforementioned studies. We estimate our direct costs to complete these in-process clinical development phases and studies in CAMPATH to be approximately $50 to $55 million.

(3)		Clofarabine is a next-generation, purine nucleoside antimetabolite that is currently under investigation in pediatric and adult leukemias and solid tumors. We initiated Phase II trials in 2002 in both children and adults with refractory acute leukemia. We have completed the submission of a New Drug Application with the U.S. Food and Drug Administration for pediatric leukemias based on Phase II data. We have also completed a Phase I trial of clofarabine in combination with the chemotherapy drug ara-C (cytarabine) in adults with a spectrum of hematologic malignancies. We are currently conducting a Phase I trial in adults with advanced solid tumors and a Phase I trial using an oral formulation of clofarabine for adults with advanced solid tumors. We estimate our direct costs to complete the in-process clinical development phases and studies in clofarabine to be approximately $2 to $4 million.

(4)		ILX-651 is a next-generation synthetic pentapeptide analog of the natural substance dolastatin-15 that targets tubulin and has been chemically modified to provide improved pharmacological properties over earlier members of its class. We recently closed a Phase I study in patients with solid tumors. We are currently conducting Phase II trials in recurrent or metastatic melanoma and in locally advanced or metastatic non-small cell lung cancer. We estimate our direct costs to complete the in-process clinical development phases in ILX-651 to be approximately $8 to $10 million.

(5)		MUC1 functions like an oncogene to promote cancer growth and is highly overexpressed on the cell surface of approximately 70% of the 1.2 million tumors diagnosed each year. Alteration in its function could potentially impact the growth of many highly resistant tumor types. MUC1 also serves an anti-apoptotic function, which could reduce the effectiveness of a variety of standard anticancer agents. If so, it appears that drugs which interfere with MUC1 could potentially improve the activity of other chemotherapy agents already in use today. We have several parallel programs under way to discover drug candidates that target MUC1. We are developing monoclonal antibodies and are exploring small molecules to disrupt MUC1 function as well as using small interfering RNA to explore and/or validate molecular targets in the MUC1 oncogenic pathway. An antibody program is being conducted through a research collaboration with Abgenix, Inc. that was initiated in 2002 to develop a fully human monoclonal antibody against MUC1 for the treatment of cancer. We estimate our direct costs to complete our preclinical development work related to MUC1 to be approximately $3 to $5 million.

ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K/A

(6)		We currently have other products in clinical trials as well as a number of preclinical programs. Other products also includes products that have been discontinued.

(7)		Other operating costs include allocations of various overhead costs.

Actual future costs to complete each and all of the above-mentioned in-process development phases could vary significantly from the estimates provided. We believe that estimates of overall major project completion dates and associated costs to complete such projects would be highly speculative due to the numerous uncertainties inherent in the pharmaceutical industry including the results of preclinical and clinical testing, competition, government regulation and uncertainties related to manufacturing. Delays or discontinuation of any of our projects could adversely impact our future revenues, liquidity and overall financial position. For additional discussion of the risks and uncertainties regarding our product development, see the “Additional Business Risks” section of this Form 10-K.

Licensing Costs. Licensing costs increased to $8.4 million in 2003 from $5.7 million in 2002, an increase of $2.7 million or 47%. In 2003, licensing costs consisted primarily of expense accruals for the achievement of milestones associated with the license grant from Genentech as well as $3.5 million paid to Bioenvision for the exclusive U.S. and Canadian sublicense for clofarabine in oncology. In 2002, licensing costs consisted primarily of a license fee expense of $4.0 million related to an exclusive, worldwide license from Knoll AG (Abbott Laboratories) for ILX-651. We may be required to make future payments in accordance with these agreements if certain drug development and time-based milestones are met.

Selling, General and Administrative Costs. Selling, general and administrative costs increased to $14.0 million in 2003, from approximately $11.3 million in 2002. This increase of $2.7 million, or 24%, is primarily due to increased compensation charges, commercialization costs and legal fees associated with the settlement charge.

Direct Costs of Research Services. Direct costs of research services expense decreased to $1.3 million in 2003, from $5.9 million in 2002. This decrease of $4.6 million, or 78%, is consistent with our aforementioned transition out of the fee-for-service CRO business.

Depreciation and Amortization. Depreciation and amortization increased to $7.5 million in 2003 from $7.4 million in 2002, an increase of $0.1 million or 1%. This increase was primarily the result of an increase in intangible assets in 2003.

Settlement charge. We incurred a net settlement charge of $16.5 million in the first quarter of 2003. This charge is the result of the settlement of a dispute with a former CRO client.

Impairment charge. We recorded an impairment charge of $213,000 in 2003. We determined that the goodwill resulting from the purchase of Symphar S.A. in 2001 had been impaired due to research focus and personnel changes at our location in Geneva, Switzerland.

Interest Income and Other, Net

Interest income and other decreased to $4.3 million in 2003, from $7.1 million in 2002, a decrease of $2.8 million, or 39%. Included in interest income and other in 2002 is a gain on the sale of a marketable security of $435,000. The remaining decrease is primarily attributable to a reduction in interest rate returns.

Interest Expense

Interest expense decreased to $4.1 million in 2003 from $6.7 million in 2002, a decrease of $2.6 million, or 39%. Interest expense relates to the imputed interest on the note to Millennium for our purchase of its interest in the Partnership. The decrease in interest expense from 2002 is the result of the decrease in the outstanding balance on which interest expense is calculated.

Net Loss

Net loss increased $15.9 million in 2003, or 34%, to $62.1 million, from $46.2 million in 2002. Net loss per share increased $0.34 per share to $1.76 per share in 2003, from $1.42 per share in 2002. Excluding the net settlement charge related to our CRO business of $16.5 million, our non-GAAP net loss was $45.6 million or $1.29 per share for the year ended December 31, 2003. Our management believes that the aforementioned non-GAAP measure of net loss and net loss per share is useful for investors as it excludes the significant, unusual settlement charge. Management also believes that excluding the settlement charge from our GAAP net loss provides users of our financial statements an important insight into our net results and the related trends, which are affecting our core business. Non-GAAP net loss and net loss per share should not be considered in isolation and are not

ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K/A

intended to represent an alternative measure of operating or net results or any other measure of performance determined in accordance with GAAP. The following table shows the reconciliation of our GAAP net loss and net loss per share to our non-GAAP net loss and net loss per share for the year ended December 31, 2003:


	Net Loss			Net Loss per share
GAAP net loss and loss per share	$	(62,114	)	$	(1.76	)
Settlement charge		16,500			0.47

Non-GAAP net loss and loss per share	$	(45,614	)	$	(1.29	)

RESULTS OF OPERATIONS — DECEMBER 31, 2002 AND 2001

Operating Revenues

Product Profit and Royalty Revenue. Product profit and royalty revenue totaled $10.8 million in 2002. Prior to January 1, 2002, our share of CAMPATH net profits on U.S. sales and royalties on the rest of the world sales was included in equity in income of joint venture.

Product Development Revenue. Product development revenue increased to $9.8 million in 2002 from $4.0 million in 2001, an increase of $5.8 million. This increase reflects the recognition of our revenues from our development and distribution partner, which prior to January 1, 2002 were included in equity in income (losses) of joint venture.

Contract Research Services Revenue. Revenue from our CRO business decreased to $9.4 million in 2002, from $25.2 million in 2001. The decrease of $15.8 million, or 63%, in our CRO revenues is consistent with our plan to transition out of the fee-for-service CRO business.

Operating Expenses

Research and Development Costs. Research and development costs increased to $46.9 million in 2002, from $33.8 million in 2001. This increase of $13.1 million, or 39%, was due to increased development spending on our product candidates, particularly for clofarabine and CAMPATH.

Licensing Costs. Licensing costs decreased to $5.7 million in 2002 from $10.3 million in 2001 or a decrease of $4.6 million or 45%. In 2002, licensing costs consisted primarily of a license fee expense of $4.0 million related to an exclusive, worldwide license from Knoll AG (Abbott Laboratories) for ILX-651. In 2001, licensing costs consisted of a $6.0 million expense accrual, also related to the exclusive worldwide license of ILX-651. Additionally in 2001, a payment of $1.1 million was made to Bioenvision upon our execution of a co-development agreement for clofarabine.

Selling, General and Administrative Costs. Selling, general and administrative costs increased to $11.3 million in 2002, from approximately $11.1 million in 2001. This increase of $0.2 million, or 2%, was due in part to our transition out of the fee-for-service CRO business, and the corresponding transition of our internal resources to focus on new business opportunities, build strategic relationships and develop our proprietary product candidates. The costs associated with these management and business development activities were previously included in direct costs of research services and are now reflected in general and administrative costs.

Direct Cost of Research Services. Direct costs of research services expense decreased to $5.9 million in 2002, from $19.5 million in 2001. This decrease of $13.6 million, or 70%, is consistent with our aforementioned transition out of the fee-for-service CRO business.

Depreciation and Amortization. Depreciation and amortization increased to $7.4 million in 2002 from $2.4 million in 2001, an increase of $5.0 million. This increase was primarily the result of the amortization of the completed technology asset and trademark, which we obtained through the acquisition of Millennium’s interest in the Partnership on December 31, 2001.

In-process Research and Development. In-process research and development was $86.1 million in 2001, due to the acquisitions of Symphar in February 2001 and Millennium’s interest in the Partnership in December 2001. The in-process research and development charge associated with the Symphar acquisition was $26.1 million, and the charge related to the acquisition of the 50% interest in the Partnership was $60.0 million.

ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K/A

Interest Income and Other, Net

Interest income and other decreased to $7.1 million in 2002, from approximately $10.0 million in 2001, a decrease of $2.9 million, or 29%. Included in interest income and other in 2001 is the accrual of a non-cash loss on the impairment of a held-to-maturity marketable security of $435,000. In 2002, this investment was sold and we recorded a $435,000 gain. The decrease of $2.9 million is primarily attributable to a decline in interest rate returns throughout 2002, which offset the gain on the sale of our held-to-maturity marketable security.

Interest Expense

Interest expense of $6.7 million relates to the imputed interest on the note to Millennium for our purchase of their interest in the Partnership. This transaction closed on December 31, 2001, and as such, a comparable amount does not exist for 2001.

Equity in Income of Joint Venture

Equity in income of joint venture was income of $3.1 million in 2001. This amount included our profit share of CAMPATH sales, which are now shown as product profit and royalty revenue. We purchased Millennium’s interest in the Partnership on December 31, 2001 and, as a result, activity related to the Partnership was included in the consolidated statement of operations of ILEX Oncology Inc. as of January 1, 2002.

Net Loss

Net loss decreased $74.8 million in 2002, or 62%, to $46.2 million, from $121.0 million in 2001. Net loss per share decreased $3.06 per share to $1.42 per share in 2002, from $4.48 per share in 2001.

LIQUIDITY AND CAPITAL RESOURCES

We have historically financed our operations primarily through the sale of our capital stock, through development and licensing fee revenues provided by our collaborative partners under our collaborative agreements and through fee-for-service or participatory revenues pursuant to contracts with our CRO clients.

At December 31, 2003, we had cash, cash equivalents, restricted investments and investments in marketable securities of $197.7 million and working capital of $95.4 million.

We expect our current funds will be adequate to cover all of our obligations for at least the next two years. Until our business can generate sufficient levels of cash from product sales, we expect to continue to finance our operations through existing cash, revenue from collaborative relationships, and proceeds from the sale of equity securities.

We plan to continue our policy of investing available funds in government securities, government agencies, government-sponsored enterprises and investment-grade, interest-bearing securities, none of which mature in more than eighteen months. We do not invest in derivative financial instruments, as defined by Statement of Financial Accounting Standards No. 133 and 138.

Our future expenditures and capital requirements will depend on numerous factors, including but not limited to: the progress of our research and development programs; the progress of our pre-clinical and clinical testing; the magnitude and scope of these activities; the time and costs involved in obtaining regulatory approvals; the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; competing technological and market developments; changes in or termination of existing collaborative arrangements; the ability to establish, maintain and avoid termination of collaborative arrangements and the purchase of capital equipment and acquisitions of compounds, technologies or businesses. As of December 31, 2003, we did not have any material commitments for capital expenditures.

ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K/A

CONTRACTUAL OBLIGATIONS

As previously discussed, we have a number of products in our pipeline. In connection with these research and development efforts, we have entered into agreements with certain development partners. The terms of these agreements require us to make payments in either cash or stock if certain drug development or time-based milestones are met. Most of the cash payments are payable in U.S. dollars, while some are payable in euros. The future minimum payments required to keep these licenses are set forth in the table below as minimum license obligations. These include annual amounts due to a licensor and patent and legal fees required to maintain our licenses. In addition, some of these agreements require us to make payments based on certain sales milestones which are not included in the table below. Total potential future commitments for the next five years, exclusive of payments related to sales milestones, under these agreements are estimated to be approximately $48.9 million based upon the assumption that all development milestones are achieved for our product pipeline.

On October 29, 2001, we announced that we had entered into a definitive Purchase and Sale agreement (Purchase Agreement) to purchase Millennium’s 50% equity interest in the Partnership. The acquisition closed on December 31, 2001. We estimated the purchase price at $127.6 million based on the net present value of the required future cash payments discounted at 6.5%, our estimated incremental borrowing rate on the date of purchase. The terms of the agreement required an initial cash payment of $20.0 million and an additional $120.0 million in scheduled payments over the following three years. As of December 31, 2003, $40.0 million remains due to Millennium. At our option, $10.0 million of this remainder may be paid in our common stock. We anticipate $20.0 million of the maturities will be paid in the second or third quarter of 2004 with the remaining $20.0 million to be paid on December 31, 2004. In addition, Millennium will be entitled to royalties based upon net U.S. CAMPATH sales above specified levels beginning in 2005.

Our sole supplier of CAMPATH is Boehringer Ingelheim Pharma KG (BI) in Germany. The agreement with BI is payable in euros and contains a minimum purchase quantity in kilograms, which equals approximately $4.5 million per year through 2006, or a total of approximately $13.5 million, to avoid a contractual surcharge. The minimum purchase quantity of $4.5 million per year is calculated based on the current exchange rate. We believe that the minimum purchase quantity will be satisfied.

We have several noncancelable operating leases for office space, equipment and the cGMP facility. One of our operating leases is with CTRC Research Foundation, a related party. Total future commitments under these leases are $11.6 million.

Our contractual obligations are due as set forth in the following table:


	Payments due by period ($ in thousands)
Contractual Obligations	Total		Less than 1 year		1 - 3 years		3 -5 years		More than 5 years
Minimum License Obligations	$	1,750	$	450	$	500	$	400	$	400
Debt Obligations		40,000		40,000		—		—		—
Purchase Obligations		13,500		4,500		9,000		—		—
Operating Leases		11,644		2,568		4,565		3,510		1,001

Total	$	66,894	$	47,518	$	14,065	$	3,910	$	1,401

ACCOUNTING PRONOUNCEMENTS

In January 2003, the Financial Accounting Standards Board (FASB) issued interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities” and in December 2003 issued a revised interpretation (FIN 46R). FIN 46 and FIN 46R address the accounting for, and disclosure of, investments in variable interest entities and require that the assets, liabilities and results of the activity of variable interest entities be consolidated into the financial statements of the company that has a controlling financial interest. It also provides a framework for determining whether a variable interest entity should be consolidated based on voting interest or significant financial support. We have evaluated FIN 46 and FIN 46R and determined that we do not have any variable interest entities requiring consolidation.

ITEM 8. FINANCIAL STATEMENTS AND SCHEDULES

The report of our Independent Auditors, Consolidated Financial Statements and Notes to Consolidated Financial Statements appears herein commencing on page F-1.

ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K/A

PART IV.

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K


(a)	1.	Financial Statements
		Index to Financial Statements appears on Page F-1.

(b)	Reports on Form 8-K

Report dated October 22, 2003, reporting Item 12 “Results of Operations and Financial Condition.” The report included a press release announcing our financial results for the third quarter of 2003.


Exhibit
Number		Identification of Exhibit
2.1		Purchase and Sale Agreement dated October 29, 2001 by and among ILEX Oncology, Inc., ILEX Acquisitions, Inc., Millennium Pharmaceuticals, Inc, and mHoldings Trust (Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed November 15, 2001)

3.1		Amended and Restated Certificate of Incorporation of the Company filed May 31, 2000 (Incorporated herein by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q filed August 8, 2000)

3.2		Bylaws of the Company, as amended (Incorporated herein by reference to Exhibit 3.2 of the Company’s Registration Statement No. 333-17769 on Form S-1 filed December 12, 1996, as amended)

4.1		Specimen of certificate representing Common Stock, $.01 par value, of the Company (Incorporated herein by reference to Exhibit 4.1 of the Company’s Registration Statement No. 333-17769 on Form S-1 filed December 12, 1996, as amended)

4.2		Rights Agreement dated April 10, 2001, by and between ILEX Oncology, Inc. and American Stock Transfer & Trust Co. which includes as Exhibit A the Form of Certificate of Designations of Series I Preferred Stock, as Exhibit B the Form of Rights Certificate and as Exhibit C the Summary of Rights to Purchase Common Stock (Incorporated herein by reference to Exhibit 4.1 to the Company’s Form 8-K filed April 11, 2001)

4.3*		First Amendment to Rights Agreement dated February 26, 2004, by and between ILEX Oncology, Inc. and American Stock Transfer & Trust Co.

10.1		Services Agreement dated November 18, 1994 between CTRC Research Foundation and the Company (Incorporated herein by reference to Exhibit 10.6 of the Company’s Registration Statement No. 333-17769 on Form S-1 filed December 12, 1996, as amended)

10.2		Covenant Not To Sue dated September 1995 between CTRC Research Foundation and the Company (Incorporated herein by reference to Exhibit 10.7 of the Company’s Registration Statement No. 333-17769 on Form S-1 filed December 12, 1996, as amended)

10.3		Commercial Industrial Sublease Agreement between TRTF/CTRCRF Building Corporation and the Company (Incorporated herein by reference to Exhibit 10.11 of the Company’s Registration Statement No. 333-17769 on Form S-1 filed December 12, 1996, as amended)

10.4*		1995 Stock Option Plan for the Company, as amended through February 25, 2004

10.5		Second Amended and Restated 1996 Non-Employee Director Stock Option Plan for the Company (Incorporated herein by reference to Exhibit 10.7 of the Company’s Annual Report on Form 10-K filed April 2, 2001)

10.6		Form of Non-Employee Director Stock Option Agreement for the Company (Incorporated herein by reference to Exhibit 10.49 to the Company’s Registration Statement No. 333-17769 on Form S-1 filed December 12, 1996, as amended)

ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K/A


Exhibit
Number		Identification of Exhibit
10.7*		2000 Employee Stock Compensation Plan for the Company, as amended through February 25, 2004

10.8		2000 Employee Stock Purchase Plan for the Company, as amended (Incorporated herein by reference to Exhibit 10.10 of the Company’s Annual Report on Form 10-K filed April 2, 2001)

10.9		Form of Pledge Agreement between Cancer Therapy and Research Center Endowment and each of Gary V. Woods and Ruskin C. Norman, M.D. (Incorporated herein by reference to Exhibit 10.55 to the Company’s Registration Statement No. 333-17769 on Form S-1 filed December 12, 1996, as amended)

10.10		Office Building Lease Agreement dated April 8, 1998, between the Company and N.W.A. Limited Partnership (Incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed August 14, 1998)

10.11†		Distribution and Development Agreement between Millennium & ILEX Partners, L.P. (now ILEX Pharmaceuticals, L.P.) and Schering AG dated August 24, 1999 (incorporated herein by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K/A filed September 21, 1999)

10.12		Letter agreement dated September 9, 1999, between the Company and Al J. Jecminek (Incorporated herein by reference to Exhibit 10.41 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1999)

10.13		Office Lease Agreement dated July 14, 2000, between Orion Fountainhead Two Partners, Ltd., and ILEX Oncology, Inc. (Incorporated herein by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q filed November 14, 2000)

10.14†		Supply Agreement dated as of June 4, 1999 between Millennium & ILEX Partners, L.P. (formerly L&I Partners, L.P.) and Boehringer Ingelheim Pharma KG. (Incorporated herein by reference to Exhibit 10.25 to the Millennium Pharmaceuticals, Inc. 10-K for the fiscal year ending December 31, 1999)

10.15†		License Agreement, dated May 2, 1997, between Millennium & ILEX Partners, L.P. (formerly L&I Partners, L.P.) and Millennium Pharmaceuticals, Inc (as successor to LeukoSite, Inc.) (Incorporated by reference to Exhibit 10.17(b) to LeukoSite, Inc.’s Registration Statement on Form S-1 (No. 333-30213) filed June 27, 1997)

10.16		2001 UK Employee Stock Compensation Plan (Incorporated herein by reference to Exhibit 10.27 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001)

10.17		Employment agreement dated January 1, 2002, between the Company and Jeffrey H. Buchalter (Incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed August 13, 2002)

10.18*		Consulting Services Agreement dated January 1, 2003, between the Company and Daniel D. Von Hoff, M.D.

11.1*		Computation of Earnings Per Share

14.1*		ILEX Oncology Inc. Code of Ethics for Senior Financial Officers

21.1		Subsidiaries of the Company


	Place of	Names Under Which
Name	Incorporation	Doing Business
ILEX Oncology Services, Inc.	Delaware	ILEX Oncology Services, Inc.
ILEX Products, Inc.	Delaware	ILEX Products, Inc.
ILEX Services Limited	United Kingdom	ILEX Services Limited
ILEX Oncology Research Sarl	Geneva, Switzerland	ILEX Oncology Research Sarl
ILEX Acquisitions, Inc.	Delaware	ILEX Acquisitions, Inc.
ILEX Pharmaceuticals, L.P.	Delaware	ILEX Pharmaceuticals, L.P.
ILEX Pharmaceuticals, LTD.	United Kingdom	ILEX Pharmaceuticals, LTD.
ILEX Pharmaceuticals, L.L.C.	Delaware	ILEX Pharmaceuticals, L.L.C.

ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K/A


23.1**		Consent of Ernst & Young LLP

23.2		Information regarding consent of Arthur Andersen LLP (Incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 filed March 14, 2003)

31.1**		Certification of President and Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2**		Certification of Senior Vice President and Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1**		Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2**		Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

*		Filed as an Exhibit to the Company’s Form 10-K filed on March 12, 2004.

**		Filed herewith.

†		Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.

ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K/A

Signatures

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

Date: May 3, 2004


		By:		/s/ Jeffrey H. Buchalter

				Jeffrey H. Buchalter
				President and Chief Executive Officer
				(Principal Executive Officer)

		By:		/s/ Mark P. Mellin

				Mark P. Mellin
				Senior Vice President and Chief Financial Officer
				(Chief Financial and Accounting Officer)

Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.

Date: May 3, 2004


Signature		Title
/s/ Joy A. Amundson

Joy A. Amundson		Director, Chairman of the Board

/s/ Joseph S. Bailes, M.D.

Joseph S. Bailes, M.D.		Director

/s/ Jeffrey H. Buchalter

Jeffrey H. Buchalter		Director

/s/ Jason S. Fisherman, M.D.

Jason S. Fisherman, M.D.		Director

/s/ Richard L. Love

Richard L. Love		Director

/s/ Victor P. Micati

Victor P. Micati		Director

/s/ Daniel D. Von Hoff, M.D.

Daniel D. Von Hoff, M.D.		Director

/s/ Mark E. Watson, Jr.

Mark E. Watson, Jr.		Director

/s/ Gary V. Woods

Gary V. Woods		Director

ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K/A

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


	Page
Report of Independent Auditors		F-2
Consolidated Balance Sheets as of December 31, 2003 and 2002		F-4
Consolidated Statements of Operations — For the Years Ended December 31, 2003, 2002 and 2001		F-6
Consolidated Statements of Stockholders’ Equity and Comprehensive Income — For the Years Ended December 31, 2003, 2002 and 2001		F-7
Consolidated Statements of Cash Flows — For the Years Ended December 31, 2003, 2002 and 2001		F-8
Notes to Consolidated Financial Statements		F-9

F-1

ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K/A

Report of Independent Auditors

To the Board of Directors and Stockholders of ILEX Oncology, Inc. and Subsidiaries:

We have audited the accompanying consolidated balance sheets of ILEX Oncology Inc. and subsidiaries as of December 31, 2003 and 2002 and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. The consolidated financial statements of ILEX Oncology Inc. and subsidiaries as of December 31, 2001, and for the year then ended were audited by other auditors who have ceased operations and whose report dated February 25, 2002 expressed an unqualified opinion on those statements before the reclassification adjustments and conforming disclosures described in Note 2.

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

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

As discussed in Note 2 to the consolidated financial statements, in 2002 the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”.

As discussed above, the consolidated financial statements of ILEX Oncology Inc. and subsidiaries as of December 31, 2001, and for the year then ended were audited by other auditors who have ceased operations. As described in Note 2, these financial statements have been revised. We audited the reclassification adjustments and conforming disclosures described in Note 2 that were applied to revise the 2001 financial statements. In our opinion, such reclassification adjustments and conforming disclosures are appropriate and have been properly applied. However, we were not engaged to audit, review, or apply any procedures to the 2001 financial statements of the Company other than with respect to such reclassification adjustments and conforming disclosures and, accordingly, we do not express an opinion or any other form of assurance on the 2001 financial statements taken as a whole.


		/s/ Ernst & Young LLP

San Antonio, Texas
January 23, 2004,,
except for Note 19, as to which the date is
February 26, 2004

F-2

ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K/A

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To ILEX Oncology, Inc.:

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

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


		/s/ ARTHUR ANDERSEN LLP

San Antonio, Texas
February 25, 2002

THIS IS A COPY OF THE AUDIT REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP IN CONNECTION WITH ILEX ONCOLOGY, INC.’S FILING ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2001. THIS AUDIT REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP IN CONNECTION WITH THIS FILING ON FORM 10-K. SEE EXHIBIT 23.2 FOR FURTHER DISCUSSION.

F-3

ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K/A

CONSOLIDATED BALANCE SHEETS
(in thousands)


	December 31
ASSETS	2003		2002
Current assets:
Cash and cash equivalents	$	63,154	$	29,679
Investments in marketable securities		75,791		123,591
Restricted investments		816		976
Accounts receivable, net of allowance for doubtful accounts of $5 and $30 in 2003 and 2002, respectively		166		871
Accounts receivable — Schering AG		8,363		4,701
Other receivables		2,152		3,654
Prepaid expenses and other		2,433		2,273

Total current assets		152,875		165,745

Investments in marketable securities		56,209		34,737
Restricted investments		1,691		2,017
Completed technology asset, net of accumulated amortization of $9,257 and $4,629 in 2003 and 2002, respectively		55,543		60,171
Other intangible assets, net of accumulated amortization of $517 and $200 in 2003 and 2002, respectively		4,283		2,600
Goodwill		—		213
Other assets		689		283
Property and equipment, at cost, net of accumulated depreciation of $10,302 and $7,950 in 2003 and 2002, respectively		3,805		5,140

Total assets	$	275,095	$	270,906

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

F-4

ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K/A

CONSOLIDATED BALANCE SHEETS
(in thousands, except per share and share amounts)


	December 31
LIABILITIES AND STOCKHOLDERS’ EQUITY	2003			2002
Current liabilities:
Accounts payable-
Related parties	$	—		$	136
Other		11,477			8,214
Accrued liabilities-
Related parties		564			455
Other		6,646			6,378
Deferred revenue		385			879
Advances from Schering AG		—			2,577
Note payable		38,390			38,099

Total current liabilities		57,462			56,738

Deferred revenue		1,077			—
Note payable		—			36,155
Other non-current liabilities		742			771

Total liabilities		59,281			93,664

Commitments and contingencies (see Note 16)

Stockholders’ equity:
Convertible preferred stock, $0.01 par value; 20,000,000 shares authorized; no shares issued or outstanding		—			—
Common stock, $0.01 par value; 100,000,000 shares authorized; 39,046,917 and 32,546,890 shares issued and outstanding in 2003 and 2002, respectively		390			326
Additional paid-in capital		560,632			460,014
Deferred compensation		(359	)		—
Accumulated deficit		(345,544	)		(283,430	)
Accumulated other comprehensive income		695			332

Total stockholders’ equity		215,814			177,242

Total liabilities and stockholders’ equity	$	275,095		$	270,906

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

F-5

ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K/A

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)


	Years Ended December 31
	2003			2002			2001
Revenue:
Product profit and royalty	$	23,315		$	10,843		$	—
Product development		6,307			9,786			3,994
Outlicensing revenue		2,773			634			—
Contract research services		1,762			9,400			25,178
Other		632			238			—

Total revenue		34,789			30,901			29,172

Operating expenses:
Research and development costs		49,026			46,928			33,798
Licensing costs		8,444			5,657			10,281
Selling, general and administrative		13,998			11,326			11,052
Direct costs of research services		1,341			5,897			19,535
Depreciation & amortization		7,542			7,390			2,415
Settlement charge		16,500			—			—
Impairment charge		213			—			—
In-process research and development		—			—			86,112

Total operating expenses		97,064			77,198			163,193

Operating loss:		(62,275	)		(46,297	)		(134,021	)
Other income (expense):
Interest income and other, net		4,322			7,084			9,995
Interest expense		(4,137	)		(6,654	)		—
Equity in income of joint venture		—			—			3,094

Loss before income taxes:		(62,090	)		(45,867	)		(120,932	)
Provision for foreign income taxes		(24	)		(289	)		(22	)

Net loss	$	(62,114	)	$	(46,156	)	$	(120,954	)

Basic and diluted net loss per share	$	(1.76	)	$	(1.42	)	$	(4.48	)

Weighted average number of shares of common stock outstanding		35,258			32,476			27,011

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

F-6

ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K/A

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
(in thousands, except shares)


	Common Stock															Accumulated
			$0.01		Additional											Other
			Par		Paid-In		Deferred			Treasury			Accumulated			Comprehensive
	Shares		Value		Capital		Compensation			Stock			Deficit			Income (Loss)			Total
BALANCES, December 31, 2000		25,776,243	$	258	$	312,687	$	—		$	(517	)	$	(116,320	)	$	(103	)	$	196,005
Net loss		—		—		—		—			—			(120,954	)		—			(120,954	)
Foreign currency translation		—		—		—		—			—			—			(89	)		(89	)

Comprehensive loss																				(121,043	)

Issuance of common shares for acquisition of company		521,121		5		13,902		—			—			—			—			13,907
Issuance of common shares for employee stock purchase plan		23,148		—		491		—			—			—			—			491
Exercise of stock options and warrants		246,317		2		2,494		—			—			—			—			2,496
Non-cash compensation expense		—		—		266		—			—			—			—			266
Issuance of common shares in secondary offering, net of issuance costs		5,750,000		58		128,331		—			517			—			—			128,906

BALANCES, December 31, 2001		32,316,829		323		458,171		—			—			(237,274	)		(192	)		221,028

Net loss		—		—		—		—			—			(46,156	)		—			(46,156	)
Foreign currency translation		—		—		—		—			—			—			524			524

Comprehensive loss																				(45,632	)

Issuance of common shares for employee stock purchase plan		30,576		1		270		—			—			—			—			271
Exercise of stock options		199,485		2		1,573		—			—			—			—			1,575

BALANCES, December 31, 2002		32,546,890		326		460,014		—			—			(283,430	)		332			177,242

Net loss		—		—		—		—			—			(62,114	)		—			(62,114	)
Foreign currency translation		—		—		—		—			—			—			363			363

Comprehensive loss																				(61,751	)

Issuance of common shares in secondary offering, net of issuance costs		5,500,000		55		87,365		—			—			—			—			87,420
Exercise of stock options		230,067		2		1,910		—			—			—			—			1,912
Issuance of common shares for employee stock purchase plan		33,708		—		294		—			—			—			—			294
Issuance of restricted stock		150,000		1		1,055		(704	)		—			—			—			352
Amortization of deferred compensation		—		—		—		345			—			—			—			345
Issuance of common stock to Millennium Pharmaceuticals, Inc.		586,252		6		9,994		—			—			—			—			10,000

BALANCES, December 31, 2003		39,046,917	$	390	$	560,632	$	(359	)	$	—		$	(345,544	)	$	695		$	215,814

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

F-7

ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K/A

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)


	Years Ended December 31
	2003			2002			2001
Cash flows from operating activities:
Net loss	$	(62,114	)	$	(46,156	)	$	(120,954	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		7,542			7,390			2,415
In-process research and development		—			—			86,112
Net activity of research and development partnership		—			—			(3,955	)
Deferred income taxes		—			—			(73	)
Impairment charge		213			—			—
Interest expense paid in stock		929			—			—
Non-cash compensation expense		697			—			266
Reversal of bad debt provision		(27	)		(134	)		(180	)
(Gain) Loss on investment in marketable securities		(121	)		(435	)		435
Loss on disposal of property and equipment		38			67			173
Changes in operating assets and liabilities:
(Increase) decrease in receivables, net		(1,428	)		5,070			3,107
Increase in prepaid expenses and other		(160	)		(204	)		(640	)
(Increase) decrease in other non-current assets		(406	)		226			(261	)
Increase (decrease) in accounts payable and accrued liabilities		964			(14,214	)		7,704
Increase (decrease) in deferred revenue		583			(2,761	)		(2,085	)
Increase in interest on note payable		17			4,324			—
(Decrease) increase in other non-current liabilities		(29	)		(3,816	)		281

Net cash used in operating activities		(53,302	)		(50,643	)		(27,655	)

Cash flows from investing activities:
Net activity of marketable securities’ transactions		26,449			31,725			(10,180	)
Net activity in restricted investments		486			1,117			690
Purchase of property and equipment		(1,284	)		(1,680	)		(1,992	)
Advances to joint venture		—			—			(3,369	)
License fees		(2,000	)		—			—
Proceeds from sale of property and equipment		11			124			59
Acquisitions, net of cash acquired		—			—			(22,875	)

Net cash provided by (used in) investing activities		23,662			31,286			(37,667	)

Cash flows from financing activities:
Issuance of common stock for cash, net of issuance costs		87,420			—			128,906
Exercise of stock options and warrants		1,912			1,575			2,496
Issuance of common stock for employee stock purchase plan		294			271			491
Principal payments for capital lease obligations		(37	)		(78	)		(78	)
Principal payment on note payable		(26,809	)		(37,670	)		—

Net cash provided by (used in) financing activities		62,780			(35,902	)		131,815

Effect of Exchange Rate Changes on Cash and Cash Equivalents		335			420			(74	)

Net increase (decrease) in cash and cash equivalents	$	33,475		$	(54,839	)	$	66,419
Cash and cash equivalents, beginning of year		29,679			84,518			18,099

Cash and cash equivalents, end of year	$	63,154		$	29,679		$	84,518

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

F-8

ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K/A

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands, except share information, per share information or as otherwise indicated)

1. ORGANIZATION AND OPERATIONS

ILEX Oncology, Inc. (ILEX) was incorporated in December 1993 under the laws of the State of Delaware and is a biopharmaceutical company that is focused on oncology. ILEX operates through its subsidiaries, ILEX Products, Inc. (ILEX Products) and ILEX Oncology Services, Inc. (ILEX Services) and its affiliate ILEX Pharmaceuticals LP (the Partnership). ILEX Products is focused in the areas of identification, development, manufacturing and regulatory approval of cancer therapeutics and is building a product platform concentrated primarily on oncology. ILEX Services manages the clinical trials for oncology products being developed by other companies. In 2001, we announced our intention to transition out of the fee-for-service contract research organization (CRO) business conducted by ILEX Services. The Partnership owns the rights to CAMPATH ^®, our marketed product.

In February 2001, we purchased Symphar S.A. (Symphar), now ILEX Oncology Research Sarl (Research Sarl), a research organization located in Geneva, Switzerland. Additionally, in December of 2001, we acquired Millennium Pharmaceuticals, Inc.’s (Millennium) 50% equity interest in the Partnership formerly known as Millennium & ILEX Partners, L.P. We now own 100% of the Partnership. See Note 6 for further details regarding these acquisitions.

The accompanying consolidated financial statements include the accounts of ILEX and its subsidiaries (collectively, we or us). All significant intercompany transactions and accounts have been eliminated in consolidation.

CAMPATH was developed within the Partnership. In August 1999, the Partnership granted Schering AG (Schering) exclusive distribution and marketing rights to CAMPATH in the United States, Europe and the rest of the world, other than Japan and the Asian Pacific Basin. CAMPATH was approved for marketing in the United States (U.S.) by the Food and Drug Administration (FDA) in May 2001. In February 2003, Schering AG obtained marketing and distribution rights to CAMPATH in Japan and the Asian Pacific Basin from ILEX. The European Commission (EU) issued marketing authorization for MABCAMPATH ^®, the trade name for CAMPATH in Europe, in July 2001. Under EU and authorizations in other countries, the Partnership has the right to market MABCAMPATH in the United Kingdom (U.K.) and 32 other non-U.S. countries. Schering AG began selling MABCAMPATH in Europe in August 2001. Berlex Laboratories, Inc., (Berlex) the U.S. affiliate of Schering AG, is marketing CAMPATH in the United States. Commercial launch of CAMPATH began in the United States in May 2001.

Additionally, we have other drugs in clinical development and several product candidates in late preclinical research. All product rights are either acquired or in-licensed. We have not generated any revenues from product sales of these other drugs to date, and there can be no assurance that revenues from product sales will be achieved. We have incurred net losses to date and our ability to achieve a profitable level of operations in the future will depend in large part on the ability to complete development of our compounds; obtain regulatory approvals for such compounds; commercialize these potential products through marketing agreements with other companies or, if we choose, market such compounds independently; successfully manufacture such compounds; and achieve market acceptance of such compounds. There can be no assurance that we will be successful in developing such compounds, obtaining such approvals, bringing such compounds to market, developing sales, marketing or distribution capabilities, manufacturing such products or generating market acceptance.

We expect that our current funds will be adequate to cover all of our obligations for at least the next two years. Until the business can generate sufficient levels of cash from product sales, we expect to continue to finance our operations through existing cash, revenues from collaborative relationships and proceeds from the sale of equity securities.

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ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K/A

2. SIGNIFICANT ACCOUNTING POLICIES

Reclassifications and Conforming Disclosures

2001

For the years ended December 31, 2003 and 2002, reimbursable out-of-pocket costs incurred related to CRO contracts were included in direct costs of research services and contract research service revenues when incurred in accordance with the Emerging Issues Task Force’s (EITF’s) Issue 01-14, “Income Statement Characterization of Reimbursements Received for ‘Out of Pocket’ Expenses Incurred.” Corresponding amounts for the year ended December 31, 2001, as set forth in the table below, were reclassified to conform with such presentation.


	Year Ended
	December 31,
	2001
Increase in contract research services revenues	$	4,528
Increase in direct cost of research services		(4,528	)

Impact on net loss	$	—

Depreciation has been reclassified to be presented separately on the face of the 2001 statement of operations. Depreciation expense was included in the selling, general and administrative line item in the 2001 statement of operations.

Reclassifications were made to the 2001 statement of cash flows to conform to the 2003 and 2002 presentations.

As disclosed in Footnote 15, certain conforming disclosures of 2001 amounts regarding income taxes have been provided.

2002

Certain 2002 amounts have been reclassified to conform to the 2003 presentation. These reclassifications are deemed immaterial to the overall presentation of our consolidated financial statements and therefore have not been shown in a tabular format.

Revenue Recognition

Product profit and royalty — These revenues represent our profit share resulting from net sales of CAMPATH in the U.S. and the royalties earned from sales of CAMPATH in the rest of world. Our profit share from net U.S. sales is calculated after deducting the manufacturing, marketing, selling and distribution expenses incurred by Berlex. We recognize our product profit and royalty revenue resulting from CAMPATH sales when there is persuasive evidence that a sales arrangement exists between Schering AG or Berlex and a customer, shipment has occurred, the price is fixed and determinable and collectibility is reasonably assured. Allowances are established for estimated uncollectible amounts, product returns and discounts.

Product development — These revenues represent Schering AG’s contribution to our research and development costs incurred for CAMPATH in B-cell chronic lymphocytic leukemia (CLL), multiple sclerosis (MS), non-Hodgkin’s lymphoma (NHL) and solid organ transplantation. Revenue under research and development cost reimbursement contracts is recognized as the related costs are incurred. Advance payments received in excess of amounts earned are classified as deferred revenue until earned.

Outlicensing revenue - Outlicensing revenue is earned and recognized based on the performance requirements of the respective outlicensing agreements. Non-refundable license fees for which no further performance obligations exist, and no continuing involvement by us is required, are recognized on the earlier of when the payments are received or when collection is assured. Revenue from non-refundable upfront license fees where we continue involvement through development collaboration or have an obligation to supply product is recognized ratably over the applicable development period or patent life. Revenue associated with performance milestones is recognized based upon the achievement of the milestones, as defined in the respective agreements.

Contract research services — Revenues from contract research services are related to both fixed-price and hourly-based customer contracts and are recognized on a percentage-of-completion basis or as such services are performed. Reimbursable out-of-pocket costs incurred related to such contracts are included in direct costs of research services and contract research service revenues when incurred.

Cash and Cash Equivalents. We consider all highly liquid investments with a maturity of three months or less when purchased to be cash and cash equivalents.

Restricted Investments. In connection with the lease of our corporate headquarters, we maintain a letter of credit, with the lessor as beneficiary, in the amount of approximately $1.9 million. The loan is 105% collateralized with $2.0 million in cash. The letter of

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ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K/A

credit is reduced by approximately $324.0 each year. The collateral is included in the current and noncurrent portions of restricted investments on our consolidated balance sheets. Also included in the current portion of restricted investments is our guarantee of a line of credit for a site management organization. We maintained approximately $492.0 in securities as collateral for this guarantee as of December 31, 2003 (see Note 16).

Current Assets and Current Liabilities. The carrying value of current assets and current liabilities, excluding investments in marketable securities, approximates their fair value.

Investments in Marketable Securities. With the exception of securities held in connection with the Executive Deferred Compensation Plan (EDCP), which are classified as trading securities, all of our investments are held-to-maturity. Securities are categorized as held-to-maturity when we have the positive intent and ability to hold these securities to maturity. Held-to-maturity securities are carried at amortized cost including adjustments for amortization of premiums and accretion of discounts. Securities classified as trading in connection with the EDCP are carried at current market value. Marketable securities with an original maturity of less than one year are classified on the balance sheet as current assets, while securities with a maturity of greater than one year are classified as non-current assets. The fair value of marketable securities is based on currently published market quotations (see Note 3).

Intangible Assets and Goodwill. In connection with our December 31, 2001 acquisition of Millennium’s 50% equity interest in the Partnership, we have recorded a completed technology asset that is classified as an intangible asset in our consolidated balance sheets in the amount of $64.8 million and a trademark that is classified as an intangible asset in our consolidate balance sheets in the amount of $2.8 million. These intangible assets are being amortized under the straight-line method over 14 years. As of December 31, 2003, we have recorded accumulated amortization of $9.7 million related to these assets and there is no significant residual value. We recorded amortization expense of $4.8 million related to these assets during the year ended December 31, 2003.

In December 2001, Genentech, Inc. (Genentech) announced that it was granted a patent relating to fundamental methods and compositions for the production of monoclonal antibodies using recombinant DNA technology as a result of a favorable decision in a patent interference proceeding. This decision entitled Genentech to priority over the patent held by the Celltech Group PLC, who had first received the patent in 1989. In March 2003, we finalized a license from Genentech covering the production of monoclonal antibodies, such as CAMPATH, directed at the CD52 cell surface target. Accordingly, we have recorded an intangible asset of $2.0 million associated with the license grant fee paid to Genentech in April 2003, which is being amortized under the straight-line method over approximately 13 years. We will also pay milestones and royalties based upon net U.S. sales levels. During the year ended December 31, 2003, we recorded amortization expense and total accumulated amortization of $116.9 related to this asset and there is no significant residual value.

The following table shows the estimated amortization expense, in total for the completed technology, trademark and Genentech license grant, to be incurred for each of the next five years:


Year ended	Estimated amortization
December 31,	expense
2004	$	4,984
2005		4,984
2006		4,984
2007		4,984
2008		4,984

We perform an annual impairment test of our intangible assets. As of December 31, 2003, we believe that these amounts are recoverable.

F-11

ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K/A

In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard Number 142 (SFAS No. 142), “Goodwill and Other Intangible Assets.” According to this statement, goodwill and intangible assets with indefinite lives are no longer subject to amortization, but rather an assessment of impairment must be made at least annually. This statement was effective for fiscal years beginning after December 15, 2001. Under the provisions of SFAS No. 142, the value of our goodwill recorded in connection with our acquisition of Symphar and previously referred to as the assembled workforce, was no longer subject to amortization. The following table shows the pro forma effect of the adoption of SFAS No. 142 on our net loss for the year ended December 31, 2001 as if the adoption had occurred on January 1, 2001:


	Year Ended
	December 31, 2001
Net loss, as reported	$	(120,954	)
Amortization		87

Pro forma net loss	$	(120,867	)

Basic and diluted pro forma net loss per share	$	(4.47	)

Our goodwill was reviewed as of September 30, 2003 and we determined that it had been impaired due to recent research focus changes and personnel changes. We recorded an impairment charge of $213.0 in the third quarter of 2003.

Property and Equipment. Property and equipment are reported at cost and depreciated over the estimated useful lives of the individual assets using the straight-line method (see Note 5). Leasehold improvements are amortized over the lesser of the life of the lease or the useful life of the related property. Expenditures for maintenance and repairs are charged to expense as incurred. The estimated lives used in computing depreciation and amortization are as follows:


Office equipment and furniture		3 - 10 years
Lab equipment		5 - 10 years
Leasehold improvements		1 - 15 years
Leased equipment		2 - 3 years

Deferred Revenue. Deferred revenue includes advances for services not yet rendered under contract research service agreements and billings in excess of revenue recognized. Also included in deferred revenue is a portion of the payment received from Schering AG for the exclusive development, marketing and distribution rights to CAMPATH in Japan, China and other Asian countries (see Note 12).

Credit Risk, Major Customer and Supplier. We place a portion of our cash and cash equivalents in money market accounts with high quality financial institutions. At times, such amounts may be in excess of the Federal Deposit Insurance Corporation’s insurance limit as well as the Securities Investor Protection Corporation’s limit. Our accounts receivable are primarily from pharmaceutical and biotechnology companies. Based on our evaluation of the collectibility of these accounts receivable, an allowance for doubtful accounts of $5.0 was necessary at December 31, 2003 and an allowance for doubtful accounts of $30.1 was necessary at December 31, 2002. We believe the exposure to credit risk related to the remaining accounts receivable is minimal.

Our top five CRO customers accounted for 5% of total revenue for the year ended December 31, 2003, 23% of total revenue for the year ended December 31, 2002 and 50% of total revenue for the year ended December 31, 2001. The following table represents revenue from significant CRO customers in excess of 10%:


December 31, 2003	December 31, 2002				December 31, 2001
—	$	3,037	10	%	$	4,141	14	%
						3,376	12	%
						3,361	12	%

We also record product, profit and royalty revenue, which is our profit share resulting from net sales of CAMPATH in the U.S. and the royalties earned from sales of CAMPATH in the rest of the world. Schering AG sells CAMPATH to numerous customers. We receive our proceeds from these sales directly from Schering AG. All of our product development revenue recorded on our statement of operations is from Schering AG. Additionally, our sole supplier of CAMPATH is Boehringer Ingelheim Pharma KG (BI) in Germany.

Depreciation and Amortization. In connection with the acquisition of Millennium’s interest in the Partnership, we recorded intangible assets of $67.6 million as of December 31, 2001. These intangible assets have been amortized throughout the year ended December 31, 2003 based on the remaining CAMPATH patent life. In connection with the license grant from Genentech, we have

F-12

ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K/A

recorded an intangible asset of $2.0 million as of April 30, 2003. This intangible asset has also been amortized based on the remaining CAMPATH patent life.

Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.

Interest income and other, net. Included in 2001 interest income and other, net is $435.0 related to the accrual of a non-cash loss on the impairment of a held to maturity marketable security. In 2002, we sold this investment and recorded a gain of $435.0, as the market value of the security had recovered. The gain is included in interest income and other, net on our 2002 consolidated statement of operations as of December 31, 2002. Included in 2003 interest income and other is approximately $121.0 related to a gain on the EDCP securities.

Interest Expense. Interest expense relates to the imputed interest on the note to Millennium for our purchase of their interest in the Partnership. We recorded interest expense of $4.1 million for the year ended December 31, 2003, $6.7 million for the year ended December 31, 2002 and $0 for the year ended December 31, 2001.

Income Taxes. We account for income taxes using the liability method. Under the liability method, deferred income taxes are recognized for the future tax consequences attributable to the difference between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We have incurred losses since inception for both book and tax purposes. The tax provisions recorded in 2003, 2002 and 2001 relate to amounts accrued for our wholly owned subsidiaries which operate in the U.K. and Switzerland.

Stock-Based Compensation. We use the intrinsic value method in accounting for our stock option plans. With the exception of the restricted stock grant (see Note 8), no compensation costs have been recognized in the financial statements for these plans. Had compensation cost for our stock-based employee compensation plans been determined based upon a fair value method consistent with SFAS No. 123, our net loss and loss per share would have been increased to the pro forma amounts indicated below:


		December 31,
		2003			2002			2001
Net loss	As reported	$	(62,114	)	$	(46,156	)	$	(120,954	)
	Fair value compensation cost		(8,921	)		(8,168	)		(8,024	)
	Stock grant compensation cost included in reported loss		697			—			—

	Pro forma	$	(70,338	)	$	(54,324	)	$	(128,978	)

Loss per share basic and diluted	As reported	$	(1.76	)	$	(1.42	)	$	(4.48	)
	Fair value compensation cost		(0.25	)		(0.25	)		(0.30	)
	Stock grant compensation cost included in reported loss		0.02			—			—

	Pro forma	$	(1.99	)	$	(1.67	)	$	(4.78	)

Statement of Cash Flows. Noncash financing and investing activities for the years ended December 31, 2003, 2002 and 2001, include the following:


	2003		2002		2001
Payment of principal portion of note payable in shares of our Common Stock	$	9,071	$	—	$	—
Issuance of common stock for acquisitions		—		—		13,907
Assets acquired in acquisitions		—		—		72,449
Liabilities assumed in acquisitions		—		—		14,179
Liability incurred in connection with acquisition		—		—		107,600

F-13

ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K/A

Supplemental disclosures of cash flow information for the years ended December 31, 2003, 2002 and 2001, include the following:


	2003		2002		2001
Cash paid during the year for-
Interest	$	3,192	$	2,340	$	17
Foreign income taxes		195		70		93

Foreign Currency Translation. We have wholly owned subsidiaries based in the U.K and Switzerland. The financial statements of these subsidiaries were prepared in British pounds and Swiss francs, respectively, and translated to U.S. dollars based on the current exchange rate at the end of the period for the assets and liabilities and a monthly average rate for the period in the statements of operations. Such translation adjustments are included in other comprehensive income or loss. Gains or losses on foreign currency transactions are included in interest income and other.

Net Loss Per Share. Basic net loss per share was computed by dividing net loss by the weighted average number of shares of common stock outstanding during the year. Diluted net loss per share is equal to basic net loss per share, as the effect of all common stock equivalents is antidilutive.

Business Segments. SFAS No. 131 “Disclosure about Segments of an Enterprise and Related Information” establishes standards for the way publicly traded business enterprises report information about operating segments in annual financial statements. SFAS No. 131 also establishes standards for related disclosures about products, services, geographic areas and major customers. In February 2001, we announced our intent to transition out of the fee-for-service CRO business, operated by ILEX Services, and focus our in-house drug development capabilities on our own proprietary products, including those being jointly developed with partners. As a result of our transition out of the fee-for-service CRO business, and subsequent transition of certain ILEX Services’ employees to our own products, we no longer operate in two distinct segments.

Accounting Pronouncements. In January 2003, the Financial Accounting Standards Board (FASB) issued interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities” and in December 2003 the FASB issued a revised interpretation (FIN 46R). FIN 46 and FIN 46R address the accounting for, and disclosure of , investments in variable interest entities and require that the assets, liabilities and results of the activity of variable interest entities be consolidated into the financial statements of the company that has a controlling financial interest. FIN 46 and FIN 46R provide a framework for determining whether a variable interest entity should be consolidated based on voting interest or significant financial support. We have evaluated FIN 46 and FIN 46R and determined that we do not have any variable interest entities requiring consolidation.

3. INVESTMENTS IN MARKETABLE SECURITIES

Securities held-to-maturity at December 31, 2003 are carried at book value and are summarized as follows:


			Gross Unrealized		Gross Unrealized
	Book Value		Gains		Losses			Fair Value
Government/Agency securities:
One year or less	$	28,312	$	2	$	(3	)	$	28,311
> 1 year and less than 2 years		42,710		25		(8	)		42,727
Corporate securities:
One year or less		46,584		130		(70	)		46,644
> 1 year and less than 2 years		13,499		—		(19	)		13,480

Total securities held-to-maturity at December 31, 2003	$	131,105	$	157	$	(100	)	$	131,162

Included in investments in marketable securities on our consolidated balance sheet as of December 31, 2003 are securities accounted for as trading securities that are reflected at the December 31, 2003 current market value of $895.0. These securities are recorded in connection with our EDCP (see Note 13). We recorded approximately $121.0 as unrealized gains on such securities and this amount is included in interest income and other in our consolidated statement of operations for the year ended December 31, 2003. We have also recorded a corresponding expense of approximately $121.0 in our consolidated statement of operations.

F-14

ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K/A

Securities held-to-maturity at December 31, 2002 are summarized as follows:


			Gross Unrealized		Gross Unrealized
	Book Value		Gains		Losses			Fair Value
Asset-backed securities:
One year or less	$	26,093	$	291	$	—		$	26,384
Government/Agency securities:
One year or less		2,000		41		—			2,041
> 1 year and less than 2 years		8,000		36		—			8,036
Municipal bonds:
One year or less		1,450		4		—			1,454
Corporate securities:
One year or less		94,048		762		(59	)		94,751
> 1 year and less than 2 years		26,737		440		—			27,177

Total securities held-to-maturity at December 31, 2002	$	158,328	$	1,574	$	(59	)	$	159,843

During 2002, we received cash proceeds of approximately $8.2 million from the sale of five securities, classified as held-to-maturity securities, prior to their stated maturities resulting in a net gain of $14.8. The gain on the sale of these investments is included in interest income and other, net on our consolidated statement of operations for the year ended December 31, 2002. The decision to sell these securities was based upon the decline in the securities’ credit ratings. Due to that decline, the securities no longer conformed to our investment policy. We did not sell any securities prior to their stated maturities during 2003. We have no securities with maturity dates greater than eighteen months.

4. ILEX PHARMACEUTICALS, L.P.

In May 1997, we entered into a distribution agreement with LeukoSite, Inc., now Millennium, for an equally owned joint venture, L&I Partners, L.P., for research collaboration endeavors. In March 2000, the joint venture changed its name to Millennium & ILEX Partners, L.P. We entered in to an agreement to purchase Millennium’s interest in the Partnership on October 29, 2001 and the transaction was completed on December 31, 2001 (see Note 6). Accordingly, the balance sheet of the Partnership has been consolidated as of December 31, 2001. Prior to December 31, 2001, we accounted for our investment in the Partnership using the equity method of accounting.

In August 1999, the Partnership entered into a distribution agreement, which granted Schering AG exclusive marketing and distribution rights to CAMPATH in the U.S., Europe and the rest of the world except Japan and the Asian Pacific Basin, where ILEX had retained rights. In accordance with the distribution agreement, Schering AG advanced $30.0 million to the Partnership for these rights and for the achievement of certain regulatory milestones. In January 2003, Schering AG obtained the marketing and distribution rights to CAMPATH in Japan and the Asian Pacific Basin from us.

The $30.0 million was initially recorded as a liability on the Partnership’s balance sheet described as “Advances from Schering AG”. In accordance with the distribution agreement, and through the first quarter of 2003, the Partnership recorded development revenues and reduced the advance balance for qualified development expenses which it incurred. As of the first quarter of 2003, the entire advance balance from Schering had been depleted. Schering AG continues to fund a portion of the CAMPATH development costs and these proceeds are recorded as product development revenue on our statement of operations.

The following is summarized financial information for the Partnership before its consolidation with us:

Summarized Income Statement Information


	2001
Revenue	$	18,072
Operating expenses		11,414

Operating income (loss)		6,658
Net income (loss)	$	6,188

5. PROPERTY AND EQUIPMENT

During 2003, we disposed of certain office furniture and equipment with a cost of $386.6, and a net book value of approximately $51.4. During 2002, we disposed of certain office furniture and equipment with a cost of $482.0 and a net book value of approximately $128.0. Net loss for the year ended December 31, 2003, includes a loss of $38.0; net loss for the year ended

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ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K/A

December 31, 2002 includes a loss of $67.0 and net loss for the year ended December 31, 2001 includes a loss of $173.0. These losses resulted from the disposition of furniture and equipment and have been included in our operating expenses. Depreciation expense for the year ended December 31, 2003 was $2.6 million; depreciation expense for the year ended December 31, 2002 was $2.6 million and depreciation expense for the year ended December 31, 2001 was $2.4 million. Property and equipment are composed of the following:


	December 31,
	2003			2002
Office equipment and furniture	$	8,806		$	8,455
Lab equipment		3,579			3,145
Leased equipment		216			216
Leasehold improvements		1,506			1,274

		14,107			13,090
Accumulated depreciation and amortization		(10,302	)		(7,950	)

Net property and equipment	$	3,805		$	5,140

6. MERGERS AND ACQUISITIONS

The Partnership

As previously discussed, we closed our acquisition of Millennium’s 50% equity interest $40.0 million in the Partnership on December 31, 2001. The terms of the agreement included an initial cash payment of $20.0 million and an additional $120.0 million in scheduled payments. The first payment of $40.0 million was made in cash on December 31, 2002. In 2003, $30.0 million of the $40.0 million scheduled payment was made in cash and $10.0 million of the scheduled payment was made in our common stock. The remaining $40.0 million is due in 2004, $10.0 million of which may again be paid with our common stock, subject to certain terms and conditions and at our option. In 2004, $20.0 million of the $40.0 million annual payment is due 45 days after the end of the calendar quarter in which net U.S. CAMPATH sales exceed a specified level. In addition to the scheduled payments, Millennium will be entitled to royalty payments based on net U.S. CAMPATH sales above specified levels beginning in 2005. At closing, we estimated the purchase price at $127.6 million based on the net present value of the cash payments discounted at approximately 6.5%, our estimated incremental borrowing rate. The purchase price was allocated to the assets purchased and in-process research and development costs based upon their respective fair values. The purchase price was allocated as follows:


Completed technology asset	$	64,800
Trademark		2,800
In-process research and development		60,000

Total purchase price	$	127,600

The purchase price was arrived at through negotiations between Millennium and us and was based on a variety of factors, including but not limited to the prospect for commercializing certain of the assets of the Partnership.

We recorded a completed technology asset in the amount of $64.8 million and a trademark asset in the amount of $2.8 million. These intangible assets are being amortized over 14 years. Additionally, in connection with the purchase, we consolidated approximately $14.0 million of assets and liabilities of the Partnership.

Additionally, in connection with the purchase price allocation, $60.0 million was expensed as a charge for the purchase of in-process research and development. We allocated values to the in-process research and development based on an independent appraisal of the research and development projects. The income approach was utilized to develop values for our completed technology and know-how, in-process research and development and trademark. In assessing the qualification of the acquired assets as in-process research and development, the developmental projects were evaluated in the context of SFAS No. 2 and SFAS No. 86. The evaluation consisted of a specific review of the efforts, including the overall objectives of the project, progress toward the objectives and the uniqueness of the developments of these objectives.

Further, each in-process research and development project was reviewed to determine if technological feasibility had been achieved. The acquired in-process research and development was confined to new products and technologies under development that were intended to address emerging market needs and requirements. No routine efforts to incrementally refine or enhance existing products or production activities were included in the acquired in-process research and development. It was determined that the in-process technologies could only be used for specific and intended purposes. Due to the specialized nature of the CAMPATH clinical trial programs, management anticipated no alternative future value from these efforts if the projects were not completed as planned.

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As of the acquisition date, we had initiated several research and development programs including post-marketing CLL trials to obtain a first line treatment label, as well as clinical studies related to potential new markets such as NHL, MS and transplant indications. Projected revenues for in-process R&D cash flows were based on forecasts provided by us and Schering AG management. Revenues for non-CLL indications were estimated to begin anywhere from 2002-2004. Revenues were expected to peak in 2010-11 and decline thereafter. Approximate market share ranges for the respective indications were: CLL:10-24%; NHL:1-12%; MS: 1-20%; and transplant indications: 5-25%. Costs of revenue and selling, general and administrative expenses were estimated as a percentage of revenue. Research and development expense was segregated into (a) maintenance R&D and (b) development or cost-to-complete R&D. Maintenance research and development was provided as a part of management’s forecast, which was estimated at $500.0 for 2001 with annual increases of 5%. These expenses were charged to the in-process R&D cash flows based on their respective share of overall revenue. Development R&D expense was also projected by management for each indication.

For the purposes of the independent appraisal, only the economics related to the lead indications for CAMPATH were considered. These indications are CLL, NHL, MS and transplant indications.

CLL represents approximately 37% of the in-process research and development value and approximately 77% of the completed technology asset based on discount rates of 25% for both in-process research and development and the completed technology asset. CLL is characterized by the abnormal accumulation of a specific type of leukocyte, eventually leading to bone marrow dysfunction and enlargement of the lymph nodes, liver and spleen. Our current FDA approval is for third-line treatment of CLL. Preliminary research indicates that it may be effective as a second-line or even primary agent for the disease. Based on management’s forecast, the breakdown of CLL patient treatments approximates the following: third-line treatments (15%), second-line treatments (35%) and first-line treatments (50%). The approximate CLL market size in the U.S. was estimated at over $300.0 million in 2001 and was expected to grow to nearly $400.0 million in 2005. As of the date of the acquisition, the project was expected to generate net cash inflows no sooner than 2003 and we expected to spend an additional $19.0 million to complete the ongoing development related to the in-process research and development. Additionally, as of the date of the acquisition, we had not abandoned, nor had any plans to abandon the CAMPATH clinical trial programs related to first-line CLL treatments.

NHL represents approximately 43% of the in-process research and development value and 23% of the completed technology asset based on discount rates of 27.5% and 25%, respectively. NHL is a term that describes a collection of lymphomas, or malignant tumors that develop in the lymphatic system, with different natural courses, responses to treatment and overall survival rates. Based on management forecast data, the approximate market size in the U.S. was estimated at over $1.3 billion in 2001 and at nearly $1.6 billion in 2005. As of the date of the acquisition, the project was expected to generate net cash inflows no sooner than 2005 and we expected to spend an additional $20.0 to $22.0 million in research and development to complete ongoing development related to the in-process research and development. As of the date of the acquisition, we had not abandoned, nor had any plans to abandon proposed CAMPATH clinical trial programs related to the NHL indication.

MS represents approximately 17% of the in-process research and development value based on a discount rate of 30%. MS is signified by multiple areas of inflammation and scarring of the myelin in the brain and spinal cord. Myelin is the tissue that covers and protects nerve fibers. When this occurs, nerve communication is disrupted. The necessity for early treatment is becoming increasingly clearer, as such treatment appears to delay disability, presumably by decreasing the injury to the nervous system by MS. Based on management forecast data, the approximate MS treatment market size in the U.S. was estimated at over $650.0 million in 2001, increasing to over $750.0 million in 2005. As of the acquisition date, this project was expected to generate net cash inflows no sooner than 2004 and we expected to spend an additional $17.0 million in research and development to complete ongoing development. Additionally, as of the date of the acquisition, we had not abandoned, nor had any plans to abandon proposed CAMPATH clinical trial programs related to the MS indication.

Transplant indications represented approximately 3% of the in-process research and development value based on a discount rate of 40%. As of the acquisition date, this project was expected to generate net cash inflows no sooner than 2003 and we expected to spend an additional amount of $100.0 to $300.0, to complete ongoing development related to the in-process research and development. Additionally, as of the date of the acquisition, we had not abandoned, nor had any intentions to abandon proposed CAMPATH clinical trial programs related to transplant indications.

A charge was assessed against the oncology projects (CLL and NHL) in-process research and development cash flows to reflect the leverage of clinical trial experience gained during the development and approval process for our current CAMPATH label. Based on a standard rate calculation and review of comparable industry data, a core charge of 3% was utilized. Other charges decreasing the in-process research and development cash flows included the following: (i) Schering AG’s profit share interest; (ii) return on working capital and fixed assets and (iii) return on the trademark intangible asset. According to industry analyst reports, pharmaceutical product life cycles are generally segmented into three categories based on several characteristics: short (product revenue peaks 5-7 years post-launch), medium (revenue peaks 8-10 years post-launch), and long (revenue peaks 12-15 years post-

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launch). The analysis utilized a medium life cycle assessing the value of our in-process research and development. Without successfully completing the in-process research and development projects, we would be unable to realize product revenue for additional indications.

Our completed technology resides in our right to manufacture and market CAMPATH specifically for patients with B-cell chronic lymphocytic leukemia who have been treated with alkylating agents and have failed fludarabine therapy. The current CAMPATH label is considered a third-line treatment for CLL. Since 1999 and through the date of the acquisition, we had spent over $18.0 million on CAMPATH development efforts related to the approved indication. Projected revenue for the completed technology cash flows were based on forecasts provided by our management. The forecast for the U.S. market was a bottoms-up approach beginning with the incidence of CLL. The forecast for the non-U.S. market was provided to ILEX from Schering AG. Cost of revenue and selling, general and administrative expenses were projected as a percentage of revenue. These expenses were charged to the completed technology cash flows based on their respective share of overall revenue. Other charges decreasing the completed technology cash flows included: Schering AG’s profit share interest, return on working capital and fixed assets, and return on the trademark intangible asset. The discount rate of 20% was used to reflect the lower level of risk inherent in the approved CAMPATH label. The projected financial data used in the analysis included only cash flows attributable to the acquired Partnership assets.

Our trademark value is attributable to CAMPATH and variations thereof, including MABCAMPATH that is utilized in the European market. The analysis utilized the relief from royalty method in determining the value of the CAMPATH trademark. In applying this method, a hypothetical royalty expense is calculated by applying a reasonable royalty rate to expected revenues. Management anticipates using the CAMPATH trademark for oncology-related indications. Non-oncology revenue streams will likely have different branding and marketing. The trademark analysis considered only the CLL and NHL projected revenues as a base for the royalty calculation. The analysis considered several different royalty rate indications in estimating a royalty rate that reflected the CAMPATH brand’s relative characteristics. In addition, an industry accepted general rule for assessing intangible value was considered. This rule indicates that 25% of operating income is an appropriate royalty rate for key intellectual property. After consideration of each indication, a pre-tax royalty of 1% was selected for the trademark analysis. A discount rate similar to that of the overall Company was considered appropriate for this analysis.

As of December 31, 2003, we had no plans to abandon any of the projects associated with the above indications. We believe that the foregoing assumptions used in the purchase price allocation were reasonable at the time of acquisition. No assurance can be given, however, that the underlying assumptions used to estimate revenue, development costs or profitability or the events associated with such projects will transpire as estimated. For these reasons, actual results may vary from projected results. The most significant and uncertain assumptions relating to the in-process projects relate to the projected timing of completion and revenues attributable to each project.

Symphar

On February 13, 2001, we acquired Symphar, a research firm located in Geneva, Switzerland. The acquisition has been accounted for using the purchase method of accounting. Under the terms of the agreement, we acquired Symphar for approximately $28.9 million, which included cash of $15.0 million and 521,121 shares of our common stock. The value of the common stock issued in connection with this merger was calculated using a fair value of $26.6875 per share. This per share fair value represents the closing price of our common stock on the day the merger was announced.

The Symphar purchase price was allocated to the assets purchased, liabilities assumed, goodwill and in-process research and development expense based upon their respective fair values as follows:


Current assets	$	2,744
Property and equipment		215
Goodwill		300
Current liabilities		(464	)
In-process research and development		26,112

Total purchase price	$	28,907

The cash portion of the purchase price came from our working capital. The amount paid by us was arrived at through negotiations between the shareholders of Symphar and us and was based on a variety of factors, including but not limited to, the prospect for commercializing certain of the assets of Symphar and the nature of the research-based pharmaceutical industry. The entity now operates under the name ILEX Oncology Research Sarl (Research Sarl).

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Of the $15.0 million cash payment, we placed $4.5 million in escrow as a reserve for possible indemnification against certain future claims. As of December 31, 2002, the entire $4.5 million had been released from escrow. Additionally, under the terms of the agreement, $5.0 million of the purchase price was held as a contingent payment. The additional contingent payment was earned in December 2001 and, accordingly, we recorded an additional $5.0 million in-process research and development expense, which is included in the total purchase price of approximately $28.9 million. The agreement also specified that, subject to the viability of performance, we agreed to fund a minimum operating and capital budget between $4.0 to $5.0 million annually for each of the three years following the acquisition.

We recorded goodwill in the amount of $300.0 related to an assembled work force. This asset was amortized throughout 2001 based on an estimated useful life of three years. In accordance with SFAS No. 142, we ceased amortization on January 1, 2002 and, as a result of a review of the goodwill as of September 30, 2003, we recorded an impairment charge of $213.0 due to recent research focus changes and personnel changes. In accordance with purchase accounting, we have included the results of operations for Research Sarl from the date of acquisition.

In connection with the purchase price allocation, $26.1 million was expensed as a charge for the purchase of in-process research and development. We allocated values to the in-process research and development based on an independent appraisal of the research and development projects. The income approach was the primary technique utilized in valuing the purchased research and development projects. The value assigned was limited to significant research projects for which technological feasibility had not been established, including development, testing and regulatory activities associated with the introduction of Research Sarl’s projected product launches. The value assigned to purchased in-process technology was determined by estimating the costs to develop the purchased in-process technology into commercially viable products, estimating the resulting net cash flows from the projects and discounting the net cash flows to their present value. Due to the complexity of the acquired research and development, the technologies under development could, once completed, only be economically used for their specific and intended purposes in the targeted disease segments. If we were to fail in our efforts to commercialize these developmental drug candidates, no alternative economic value is envisioned. The assembled work force was valued using the cost approach. Under this approach, the work force is valued by calculating the savings realized by us through obtaining a pre-existing, trained and fully efficient operations and administrative team rather than incurring the costs to assemble and train an equivalent workforce.

The independent appraisal also considered the fact that the existing know-how diminishes in value over time as new technologies are completed and changes in market conditions render current products and methodologies obsolete. The assumptions underlying the cash flow projections used were derived primarily from investment banking reports, historical results, company records and discussions with management.

The revenue projection used to value the in-process research and development was based on estimates of relevant market sizes and growth factors, expected trends in technology and the nature and expected timing of new product introductions by us and competitors. Future royalty revenue estimates were aggregated for the APOMINE cancer indications and Lp(a) inhibitor based on management’s estimate of the following: (i) addressable number of patients in the U.S. market, (ii) market penetration, (iii) average sales price, (iv) estimate of remaining worldwide market and (v) the Company’s projected royalty rate received from its partner. The discount rate selected for the in-process technology was 30% for both APOMINE and Lp(a). Due to the aggressive nature of management’s forecast and the high level of risk associated with the Company achieving the projected cash flows, the discount rate was calculated using venture capital-type rates of return. The rate was determined based on analysis of three venture capital studies utilizing rates appropriate to start-up type companies.

For the purposes of the independent appraisal, only the economics related to Research Sarl’s lead drug candidates, APOMINE and Lp(a) were considered. It was determined that forecasting cash flows for Research Sarl’s other developmental projects was not feasible at the time of acquisition due to their early stage of development. At the time of acquisition, management estimated that approximately $14.0 million to $15.0 million had been spent on APOMINE and Lp(a), and an additional $17.0 million to $20.0 million was expected to be incurred to complete clinical testing and gain marketing approval.

APOMINE, targeted at oncology as well as osteoporosis, represented approximately 45% of the in-process research and development value. As of the date of the acquisition, the project was expected to be completed and commercially available in the U.S. no sooner than 2007 for its first cancer indication. Management believes that we may be able to license APOMINE and related compounds to a pharmaceutical company or marketing partner for the osteoporosis indication upon acquisition of the necessary clinical data in 2005. Accordingly, as of December 31, 2003, we continue to pursue and invest resources in the clinical development of APOMINE for osteoporosis, however we have determined that we will no longer pursue our development of APOMINE in cancer.

Lp(a), an inhibitor that may lead to a reduction in coronary heart disease, represented approximately 55% of the in-process research and development value. As of the date of the acquisition, the Lp(a) project was expected to be completed and

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commercially available in the U.S. no sooner than 2007, with an estimated cost to complete of approximately $5.0 million to $6.0 million. In the second quarter of 2003, we signed an agreement with QuatRx Pharmaceuticals, Co. granting them an exclusive worldwide license to certain cardiovascular research platforms associated with Lp(a) (see Note 11).

We believe that the foregoing assumptions used in the purchase price allocation were reasonable at the time of the acquisition. No assurance can be given, however, that the underlying assumptions used to estimate revenue, development costs or profitability or the events associated with such projects will transpire as estimated. For these reasons, actual results may vary from projected results. The most significant and uncertain assumptions relating to the in-process projects relate to the projected timing of completion and revenues attributable to each project.

The following table reflects unaudited pro forma combined results of operations of ILEX and Research Sarl, as if the acquisition had occurred on January 1, 2001. Included in pro forma results is amortization of the goodwill of $100.0 for the year ended December 31, 2001. Also included in the pro forma results is $26.1 million recorded as in-process research and development for the year ended December 31, 2001. Such pro forma information is presented for informational purposes only and is not necessarily indicative of the consolidated results that would have been achieved had the acquisition actually been consummated at January 1, 2001.


	Year Ended
	December 31,2001
Total revenue	$	29,567
Net loss		(120,967	)

Basic and diluted net loss per share	$	(4.47	)

7. SETTLEMENT CHARGE

In April 2003, our subsidiary, ILEX Services settled a dispute with a former contract research organization (CRO) customer. As a result of this settlement, ILEX Services paid the former CRO customer $20.0 million in the second quarter of 2003. We recorded a settlement charge in the first quarter of 2003 of $16.5 million, which is net of insurance reimbursement of $3.5 million, related to the settlement of this dispute.

8. STOCKHOLDERS’ EQUITY

On August 4, 2003, we completed an underwritten public offering of our common stock, pursuant to which we sold 5.5 million shares. In addition, the Cancer Therapy and Research Center Endowment, an ILEX shareholder, offered and sold 500,000 shares of our common stock. Proceeds, net of costs to us, from this offering were approximately $87.4 million. The net proceeds from this offering will be used to fund clinical trials of our lead product candidates; for clinical and preclinical studies for our other product candidates; for potential licenses and acquisitions of other businesses or complementary products and technologies; and for working capital, capital expenditures and other general corporate purposes.

In March 2003, we granted 150,000 shares of restricted stock to one of our officers. In accordance with the restricted stock agreement, 50,000 shares vested immediately and the remaining 100,000 shares vest at a rate of 33% per year over the following three years. The fair market value of the restricted stock on the grant date was approximately $1.1 million. As of December 31, 2003, approximately $697.0 has been recognized as compensation expense in our consolidated statement of operations and the remaining $359.0 is included in deferred compensation in our consolidated balance sheet.

In November 2001, we completed an underwritten public offering of our common stock pursuant to which we sold 5.75 million shares. The number of shares sold included the underwriters’ exercise of their overallotment option. Proceeds, net of offering costs, to us from this offering were approximately $128.9 million, which includes the reissuance of our 39,000 treasury shares.

On March 30, 2001, our Board of Directors declared a dividend of one Preferred Share purchase right (Right) for each outstanding share of our common stock, par value $.01 per share (the Common Shares), and authorized the issuance of one Right for each Common Share which shall become outstanding between April 20, 2001, the Record Date and the earlier of the Distribution Date (as defined in the Rights Agreement (Rights Agreement), filed with the Securities and Exchange Commission as an exhibit to a Current Report on Form 8-K dated April 1, 2001, and the first amendment to the Rights Agreement filed herewith) or the final expiration date of the Rights. The dividend was payable on, April 20, 2001, to the stockholders of record on that date. Each Right entitles the registered holder to purchase from us one one-thousandth interest in one share of our Series I Preferred Stock, par value $.01 per share (the Preferred Shares), at a price of $120 per one one-thousandth interest in a Preferred Share (the Purchase Price), subject to adjustment. The Rights will become exercisable ten days after (i) an Acquiring Person accumulates beneficial ownership

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of 20% or more of our common stock or (ii) following the commencement of, or announcement of an intention to make, a tender offer or exchange offer the consummation of which would result in an Acquiring Person accumulating 20% or more of the common stock. In the event that we are, in effect, acquired by an Acquiring Person in a merger or other business combination transaction or 50% or more of our consolidated assets or earning power is sold to an Acquiring Person, proper provision will be made so that each holder of a Right will thereafter generally have the right to receive, upon the exercise thereof at the then current exercise price of the Right, that number of shares of common stock of the acquiring company which at the time of such transaction will have a market value of two times the then current Purchase Price of the Right. The description and terms of the Rights are set forth in a Rights Agreement between us and American Stock Transfer & Trust Co., as Rights Agent. The plan was not adopted in response to any unsolicited offer or takeover attempt.

9. STOCK OPTIONS AND STOCK PURCHASE WARRANTS

SFAS No. 123, “Accounting for Stock-Based Compensation” defines a fair value based method of accounting for employee stock options or similar equity instruments and encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. Under the fair value based method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period of the award, which is usually the vesting period. However, SFAS No. 123 also allows entities to continue to measure compensation costs for employee stock compensation plans using the intrinsic value method of accounting prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25). We have adopted SFAS No. 123 and have elected to remain with the accounting prescribed by APB 25. We have made the required disclosures prescribed by SFAS No. 123.

During 2001, we adopted the 2001 UK Stock Option Plan (the UK Plan). Under the UK Plan, stock options may be granted to our key employees and directors. The UK Plan is part of the 2000 Employee Stock Compensation Plan (2000 Plan). Shares granted under the UK Plan are granted from the total shares available for grant under the 2000 Plan. Stock options vest pursuant to the individual stock option agreements, usually 25% per year beginning one year from the date of grant, with unexercised options expiring ten years from the date of grant. Pursuant to the UK Plan, as of December 31, 2003, options allowing the purchase of 7,400 shares have been granted; options covering 5,280 shares have been forfeited and all options remain unexercised.

During 1995, we adopted a stock option plan (the 1995 Plan). Under the 1995 Plan, stock options may be granted to our key employees and consultants as approved by a committee of our board of directors. Originally, we had reserved 1,141,807 shares of common stock for issuance in accordance with the 1995 Plan. In May 1998, our shareholders approved an increase in the number of authorized shares of common stock reserved for issuance under the 1995 Plan to 1.8 million. Stock options vest pursuant to the individual stock option agreements, usually 25% per year beginning one year from the date of grant, with unexercised options expiring ten years from the date of grant. As of December 31, 2003, 5,705 shares were available for grant under the 1995 Plan.

In October 1996, we adopted a nonemployee directors’ stock option plan (the 1996 Plan). The total number of options that may be granted under the 1996 Plan is 225,000. Under the 1996 Plan, each nonemployee director is granted an option for up to 17,500 shares of common stock upon appointment to the board. As of December 31, 2003, nonemployee directors had been granted a total of 154,896 options upon appointment to the board which vest at 1/48 per month. Additionally, each nonemployee director is eligible, based on their participation in meetings of the board of directors and committees thereof, to receive up to 6,000 stock options annually, which are fully vested at the time of grant. As of December 31, 2003, nonemployee directors had been granted 81,000 of these options for participation. All options issued under the 1996 Plan expire ten years from the date of grant unless the nonemployee director resigns or is not reelected. Currently, options are granted to directors under the 2000 Plan. Our directors have been granted a total of 131,576 options under the 2000 Plan. As of December 31, 2003, 17,768 shares were available for grant under the 1996 Plan.

In May 2000, shareholders approved a proposal to ratify the adoption of the 2000 Plan. The 2000 Plan authorizes a committee of the Board of Directors to issue options intended to qualify as incentive stock options (“ISOs”) as defined in Section 422 of the Internal Revenue Code of 1986 (the Code), stock options that are not intended to conform to the requirements of Section 422 of the Code (“Non-ISOs”), and restricted stock awards. Originally, we had reserved 3.0 million shares of common stock for issuance under the 2000 Plan. In 2002, we increased the authorized number of shares of common stock reserved for issuance under the 2000 Plan to 3.25 million, and in January 2003, the authorized number of shares was increased to 4.25 million. Stock options vest pursuant to the individual stock option agreements, usually 25% per year beginning one year from the date of grant, with unexercised options expiring ten years from the date of grant. As of December 31, 2003, 913,066 shares were available for grant under the 2000 Plan.

In connection with a prior private placement of convertible preferred stock, we issued 355,913 warrants for the purchase of common stock at approximately $8.76 per share. As a result of an additional private placement in July 1999, the exercise price of

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the warrants was adjusted to $8.71. In July 2001, all outstanding warrants associated with this prior private placement were exercised.

A summary of the status of our fixed stock option plans for the years ended December 31, 2003, 2002 and 2001, and changes during these years on those dates is presented below:


	December 31, 2003					December 31, 2002					December 31, 2001
				Weighted					Weighted					Weighted
				Average					Average					Average
				Exercise					Exercise					Exercise
	Shares			Price		Shares			Price		Shares			Price
Outstanding, beginning of year		3,863,312		$	18.17		3,153,343		$	22.99		2,476,424		$	21.72
Granted		1,249,686			17.47		1,459,416			9.37		1,208,100			24.91
Exercised		(230,067	)		8.32		(199,485	)		7.83		(212,772	)		11.09
Forfeited		(870,061	)		21.36		(549,962	)		26.24		(318,409	)		28.27

Outstanding, end of year		4,012,870		$	17.94		3,863,312		$	18.17		3,153,343		$	22.99

Options exercisable at end of year		1,457,442		$	20.71		1,387,432		$	21.19		1,111,908		$	18.24

Weighted average fair value of options granted during the year				$	9.99				$	5.67				$	14.96

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


	Options Outstanding						Options Exercisable
			Weighted				Number
			Average		Weighted		Exercisable		Weighted
			Remaining		Average		at		Average
	Number		Contractual		Exercise		December 31,		Exercise
Exercise Prices	Outstanding		Life		Price		2003		Price
$3.50		30,496		1.8	$	3.50		30,496	$	3.50
$5.78 - $8.63		1,088,157		8.3		6.88		230,757		6.97
$9.44 - $13.79		224,579		6.8		11.15		164,079		11.11
$14.75 - $21.49		1,326,984		9.2		18.98		206,748		17.84
$22.73 - $34.06		1,281,070		7.4		26.72		779,177		27.08
$36.25 - $50.00		61,584		6.3		40.11		46,185		40.11

$3.50 - $50.00		4,012,870		8.1	$	17.94		1,457,442	$	20.71

Had compensation cost for our stock-based employee compensation plans been determined based upon a fair value method consistent with SFAS No. 123, our net loss and loss per share would have been increased to the pro forma amounts indicated below:


		Years Ended December 31,
		2003			2002			2001
Net loss	As reported	$	(62,114	)	$	(46,156	)	$	(120,954	)
	Fair value compensation cost		(8,921	)		(8,168	)		(8,024	)
	Stock grant compensation cost included in reported loss		697			—			—

	Pro forma	$	(70,338	)	$	(54,324	)	$	(128,978	)
Loss per share basic and diluted	As reported	$	(1.76	)	$	(1.42	)	$	(4.48	)
	Fair value compensation cost		(0.25	)		(0.25	)		(0.30	)
	Stock grant compensation cost included in reported loss		0.02			—			—

	Pro forma	$	(1.99	)	$	(1.67	)	$	(4.78	)

For options granted in 2003, 2002 and 2001, the fair value of each option grant was estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions: dividend yield of 0% for all years; expected volatility of 77.3% in 2003, 80.0% in 2002 and 78.4% in 2001: risk free interest rate of 2.7% in 2003, 3.2% in 2002 and 4.0% in 2001. The expected life of the options granted for 2003, 2002 and 2001 is 4.0 years.

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10. RELATED-PARTY TRANSACTIONS

CTRC Research Foundation, one of our stockholders, performs certain research services for us. These services are provided at fair value. As described in Note 14, we have a lease agreement with CTRC Research Foundation Building Corporation, a joint venture comprised of CTRC Research Foundation and the Texas Research Park Foundation, for the cGMP facility. Additionally, two members of our Board of Directors are on the Board of Directors of CTRC.

U.S. Oncology, Inc. provides clinical trial patients for trials conducted by us on our own proprietary product pipeline and, in the past, on behalf of our CRO sponsors. A member of our Board of Directors was the Executive Vice President, Clinical Affairs at U.S. Oncology through January 1, 2004 and currently serves as a policy advisor to U.S. Oncology.

In May 2001, we entered into an agreement with the Arizona Board of Regents for the University of Arizona for pancreatic cancer research. As of December 31, 2002, all amounts related to this research agreement had been expensed. Additional amounts paid to the University of Arizona relate to payments to investigators. A member of our Board of Directors is currently the Director of the Arizona Health Science Center’s Cancer Therapeutics Program and Professor of Medicine at the University of Arizona Health Science Center in Tucson.

In July 1997, we entered into a consulting agreement with Dr. Von Hoff, which expired on December 31, 2002 and a new agreement was entered into in January 2003, which expires on December 31, 2004. Under the terms of the agreement, we will pay Dr. Von Hoff an annual fee of $275.0 for services provided in accordance with the agreement and reimbursement of out-of-pocket expenses incurred in connection with the services provided.

The related party subcontractors provide us with consulting services and preclinical and clinical testing related to certain of our contracts. Such costs may be included in either research and developments costs or direct costs of research services in the accompanying consolidated financial statements.

For the years ended December 31, 2003, 2002 and 2001, we incurred the following related party expenses:


	Years Ended December 31,
	2003		2002		2001
CTRC Research Foundation	$	350	$	504	$	159
CTRC Research Foundation Building Corporation		240		240		231
Director of the Company		280		342		403
Stockholders		—		—		291
US Oncology		758		512		(82	)
University of Arizona		87		856		485

	$	1,715	$	2,454	$	1,487

At December 31, 2003 and 2002, the following subcontractor costs were payable to related parties:


	December 31,
	2003		2002
CTRC Research Foundation	$	152	$	156
University of Arizona		21		206
US Oncology		391		93

	$	564	$	455

During 2001, we performed contract research services on behalf of the Partnership at our standard billing rates. For the year ended December 31, 2001, we recorded associated revenues in the amount of $3.9 million. Subsequent to the purchase of Millennium’s interest in the Partnership, these services are intercompany revenues which are eliminated.

11. LICENSING AGREEMENTS

In December 2003 and in connection with our co-development agreement, we paid Bioenvision $3.5 million, which was expensed, for the exclusive U.S. and Canadian sublicense for clofarabine in oncology. Under the terms of the agreement, an additional $4.0 million, payable in two payments, is owed upon completing the submission of the New Drug Application (NDA) which has not yet occurred. As a result, the $4.0 million has not been recorded as of December 31, 2003.

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ILEX ONCOLOGY, INC.
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In May 2003, we signed an agreement with QuatRx which granted them an exclusive, worldwide license to certain lipid-focused research platforms. In connection therewith, we received a payment of $2.5 million, which was recognized as revenue in the third quarter of 2003, as the associated technology transfer was completed during that period. We may also receive payments upon the completion of certain milestones and royalties based on net sales of a product developed from these research platforms.

On April 19, 2002, we entered into a collaboration agreement with Abgenix, Inc. (Abgenix) to identify and develop fully human monoclonal antibody candidates to the MUC1 protein, a dominant oncogene significantly overexpressed on a wide range of solid tumors. Abgenix will grant ILEX an exclusive license to commercialize products comprising one or more antibodies derived from this program. Under this agreement, we paid Abgenix $100.0 for a technology access fee. Additionally, we may be required to make future payments in accordance with the agreement if certain milestones are met.

On December 19, 2001, we entered into an agreement with Paralex, Inc. (Paralex) whereby we have granted to Paralex an exclusive license to all of ILEX’s rights to oxypurinol under an original license agreement between ILEX, GlaxoSmithKline (GSK), and The Wellcome Foundation (TWF) for the treatment of symptomatic hyperuricemia (gout) in patients who are intolerant of allopurinol. In 2002, Paralex was purchased by Cardiome Pharma Corporation (Cardiome). Under the agreement, ILEX granted Paralex, now Cardiome, an exclusive license to develop and commercialize oxypurinol in all fields under data and technology owned by us, subject only to the terms of the original license agreement with GSK and TWF. Cardiome exercised its option to acquire ownership of the clinical trial data package derived from the Phase II clinical study for the treatment of gout patients who are intolerant to allopurinol. In the event oxypurinol is commercialized, we will receive a milestone payment and a royalty from sales of oxypurinol. Additionally, Cardiome is committed to purchasing a certain level of supplies from us by year-end 2004.

In July 2001, we entered into an agreement with the Dana-Farber Cancer Institute at Harvard Medical School (DFCI) for an exclusive, worldwide license for patent rights and technology relating to the MUC1 protein. The agreement requires us to pay approximately $200.0 in past patent expenses and up to $1.0 million in license fees. As of December 31, 2003, we expensed the entire $1.2 million in license fees and past patent expenses in accordance with the agreement. We may be required to make future payments in accordance with the agreement if certain drug development milestones are met.

In July 2000, we entered into an agreement with Knoll AG (Abbott Laboratories) for an exclusive, worldwide license of ILX-651, a synthetic pentapeptide analog of dolastatin. As of December 31, 2003, we had paid $16.1 million in license fees. These fees have all been expensed. We may be required to pay future license maintenance fees in either cash or unrestricted stock in accordance with the agreement if certain drug development and time-based milestones are met.

12. DEVELOPMENT AND DISTRIBUTION AGREEMENT

In January 2003, Schering AG obtained from us the exclusive development, marketing and distribution rights to CAMPATH in Japan, China and the Asian Pacific Basin. We received an upfront payment and incurred an associated fee of 50% of such payment to the licensor, both of which are being recognized over the life of the patent in that region. We may also receive payments upon completion of certain milestones and a royalty based on net sales of CAMPATH in those areas.

13. EMPLOYEE BENEFITS

We have an employee benefit plan and trust for certain employees who meet specified length of service requirements. The plan qualifies under Section 401(k) of the Internal Revenue Code as a salary reduction plan. In January 2003, we increased the amount that employees may elect to contribute to a maximum of 25% of their salaries on a before-tax basis. Prior to 2003, employees were allowed to contribute up to 15% of their salaries on a before-tax basis. The plan is a defined contribution plan with employer contributions made solely at the discretion of the board of directors. For the years ended December 31, 2003, 2002 and 2001, administrative expenses incurred by us related to this plan were not significant. In January 2000, we elected to begin making contributions of up to 3% of an employee’s salary. Our contributions to the plan were $360.0 for the year ended December 31, 2003, $397.7 for the year ended December 31, 2002 and $418.0 for the year ended December 31, 2001. Employees are immediately fully vested in their contributions and begin vesting in employer contributions after one year of service, as defined in the plan document. We do not provide postretirement benefits or postemployment benefits to our employees.

In 2001, we adopted the EDCP, which became effective in 2002. The EDCP is a nonqualified deferred compensation plan available to a select group of our officers and other key employees. Participants in the EDCP are able to defer current federal income taxes on an unlimited amount of compensation. We match 50% of the first 6% of each participant’s contribution. Our contribution to the EDCP was $94.8 for the year ended December 31, 2003 and $80.0 for the year ended December 31, 2002. Assets associated with the EDCP of $895.0 are accounted for as trading securities and are included in investments in securities on

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ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K/A

our consolidated balance sheet. We have also recognized a liability of $895.0 related to the EDCP which is included in accrued liabilities on our consolidated balance sheet. The EDCP is unfunded for tax purposes and for purposes of Title I of ERISA. Participation in the EDCP constitutes a promise by ILEX to make payments in accordance with the terms of the EDCP, and Participants and beneficiaries shall have the status of general unsecured creditors.

14. LEASES

We have several noncancelable operating leases for office space, equipment and the cGMP facility. Rent expense associated with these leases was approximately $2.8 million for the year ended December 31, 2003, $3.9 million for the year ended December 31, 2002 and $4.0 million for the year ended December 31, 2001. One of the leases is with CTRC Research Foundation Building Corporation, a related party (see Note 10).

At December 31, 2003, future minimum lease payments under all leases are as follows:


	Related Party		Other		Total
Years ending December 31,
2004	$	240	$	2,328	$	2,568
2005		240		2,053		2,293
2006		240		2,032		2,272
2007		240		1,667		1,907
2008		240		1,363		1,603
Thereafter		480		521		1,001

Total	$	1,680	$	9,964	$	11,644

In July 2000, we entered into an agreement to lease our current corporate headquarters. The commencement date of the operating lease was October 20, 2000, with a lease term of eight years. Future minimum lease payments under this lease agreement are between $941.0 and $1.3 million per year through October 31, 2008. We account for these lease payments under the straight-line method. The lease required a deposit of approximately $140.0, which was recorded as other non-current assets. Additionally, in connection with the lease, we maintain a letter of credit, with the lessor as beneficiary, in the amount of $1.9 million. The letter of credit is 105% collateralized with $2.0 million in restricted cash.

In 2000, we entered into capital lease agreements which expired by the end of 2003. Amortization expense was $59.0, for the year ended December 31, 2003, $106.0 for the year ended December 31, 2002 and $105.0 for the year ended December 31, 2001. Interest expense was $1.0 for the year ended December 31, 2003, $10.0 for the year ended December 31, 2002 and $13.0 for the year ended December 31, 2001.

During 1995, we entered into the previously discussed related party lease agreement. The leased cGMP facility is owned by a non-profit corporation controlled by CTRC Research and the Texas Research Park Foundation. These two organizations obtained a grant to build the facility from the Economic Development Administration (EDA). The cGMP facility allows for the manufacturing of oncology drugs. Currently, the facility is being used for manufacturing support activities. Under the terms of the lease agreement, which expires in 2010 and includes three additional five-year extension options, we are required to make monthly payments, which commenced in 1998. The payments are based on a fixed monthly rate plus a percentage of gross sales, as defined in the agreement. This facility has produced no product sales subject to such payments. In the event that there is an early termination of the lease or a non-conforming use, there is a risk that we may be required to repay a portion of the EDA grant.

15. INCOME TAXES

As of December 31, 2003, we had net operating loss (NOL) carryforwards of approximately $235.0 million for U.S. federal income tax purposes, which are available to reduce future taxable income and which will expire in 2010 through 2023. As of December 31, 2003, we had federal research and development credit carryforwards of $5.6 million that will expire in 2011 through 2023. Included below in “other tax differences, net” is a gross capital loss carryforward of $2.2 million, which will expire in 2004 if not utilized against capital gains.

In addition, as of December 31, 2003, we had Swiss NOLs of approximately $1.1 million and U.K. NOLs of approximately $0.8 million. The tax effects of significant temporary differences representing deferred income tax assets and liabilities are as follows as of December 31, 2003 and 2002:

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ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K/A


	December 31,
	2003			2002
Net operating loss carryforward	$	82,716		$	59,899
Carrying value of technology		20,621			19,708
Expense provisions		474			438
Federal research and development credit carryforwards		5,611			4,811
Other tax differences, net		703			733
Valuation allowance		(110,125	)		(85,589	)

Total deferred income tax assets	$	—		$	—

The valuation allowance as of December 31, 2003 and 2002 provides a reserve against the above deferred tax assets, which were not realizable at the above dates.

The availability of the NOL and credit carryforwards to reduce U.S. federal taxable income is subject to various limitations under Section 382 of the Internal Revenue Code of 1986, as amended, in the event of a change in ownership. Such an ownership change occurred in 1999. However, we believe that the limitations will not significantly impact the ability to utilize the NOL and tax credit carryforwards before their expiration periods.

Our loss before income taxes for financial reporting purposes consists of the following:


	Years Ended December 31,
	2003			2002			2001
Domestic	$	(60,730	)	$	(48,017	)	$	(91,873	)
Foreign		(1,360	)		2,150			(29,059	)

Loss before income taxes	$	(62,090	)	$	(45,867	)	$	(120,932	)

Our tax provision of $24.0 at December 31, 2003, $289.0 at December 31, 2002 and $22.0 at December 31, 2001, relates primarily to current taxes on foreign operations. We have not provided any U.S. deferred income taxes on the undistributed earnings of our foreign subsidiaries based on the determination that such earnings will be indefinitely reinvested.

Income tax expense attributable to income from continuing operations differed from the amounts computed by applying the statutory tax rate of 35% to pre-tax loss from continuing operations as a result of the following:


	Years Ended December 31,
	2003			2002			2001
Computed “expected” tax expense	$	(21,731	)	$	(16,053	)	$	(42,327	)
Write-off of in-process research and development for book purposes		—			—			9,136
Other permanent items		(1,278	)		(127	)		86
Change in valuation allowance		24,536			19,735			32,271
Research and development credit		(800	)		(2,237	)		(1,208	)
Foreign income (loss) taxed at other than U.S. rates and other foreign items		500			(464	)		1,058
Other, net		(1,203	)		(565	)		1,006

Provision for foreign income taxes	$	24		$	289		$	22

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ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K/A

16. COMMITMENTS AND CONTINGENCIES

In September 2003, certain former shareholders of Convergence Pharmaceuticals, Inc. (Convergence) delivered to us a demand for arbitration under the Plan of Merger and Acquisition Agreement executed in connection with our acquisition of Convergence in July 1999. The demand for arbitration alleges that we breached an obligation of good faith and fair dealing by intentionally delaying Phase II trials of NM-3 in order to avoid making a milestone payment of 500,000 shares of our Common Stock that would have become due pursuant to the Plan of Merger and Acquisition Agreement if Phase II trials were initiated by December 31, 2002. The demand for arbitration was filed by former shareholders of Convergence whose pro rata share of the 500,000 share milestone payment is 210,000 shares. The parties are in the discovery phase of the arbitration proceedings. We believe that the claims made against us are without merit and intend to defend the action vigorously. However, the arbitration process is inherently uncertain and unpredictable, and accordingly there can be no assurance as to the ultimate outcome of the arbitration. If we are required to deliver shares subject to the current demand or otherwise pay damages in lieu thereof, then we may be required to deliver up to an additional 290,000 shares or pay damages to the other former Convergence shareholders in connection with potential additional disputes with other former Convergence shareholders.

During 1998, we guaranteed a line of credit for Clinical Research Group, Inc. (CRG). The guarantee gave us access to a network of clinical sites managed by CRG. If the guarantee comes to redemption, we will obtain an ownership interest in CRG in accordance with the guarantee agreement. Under the terms of the agreement, we maintained approximately $492.0 in the form of securities as collateral for the guarantee as of December 31, 2003. At December 31, 2003, we had yet to fund the guarantee, however it has been reserved for in prior financial statements.

In addition to matters described above, we are subject to various other claims and assessments arising out of the ordinary course of business. We believe it is unlikely that the final outcome of any such ordinary course of business claims or proceedings to which we are a party will have a material adverse effect on our financial position or results of operations. However, due to the inherent uncertainty of litigation, there can be no assurance that the resolution of any such claim or proceeding would not have a material adverse effect on our results of operations for the period in which such resolution occurred.

Our sole supplier of CAMPATH is BI in Germany. The agreement with BI is payable in euros and contains a minimum purchase quantity in kilograms, which equals approximately $4.5 million per year through 2006, or a total of approximately $13.5 million, to avoid a contractual surcharge. The minimum purchase quantity of $4.5 million per year is calculated based on the current exchange rate. We believe that the minimum purchase quantity will be satisfied.

In connection with research and development efforts associated with our product pipeline, we have entered into agreements with certain development partners, which generally expire over several years. The terms of these agreements require us to make payments in either cash or stock if certain drug development or time-based milestones are met. Based upon the assumption that all milestones are achieved at expected dates, total potential commitments for the next five years under these agreements are estimated to be $48.9 million due as follows:


	Milestone
	payments
Year ending December 31,
2004	$	7,928
2005		8,467
2006		19,675
2007		10,675
2008		2,175

Total	$	48,920

17. NOTE PAYABLE

In connection with the purchase of Millennium’s interest in the Partnership we were obligated to pay $140.0 million. The terms of the agreement required an initial cash payment of $20.0 million and $120.0 million in scheduled payments. The first two scheduled payments of $20.0 and $40.0 million were made on December 31, 2001 and 2002, respectively. Additionally, $40.0 million was paid in 2003, $10.0 million of which was paid with our common stock. The remaining $40.0 million is due in 2004, of which we may pay $10.0 million in our common stock subject to certain terms and conditions and at our option. Our $38.4 million current note payable balance as of December 31, 2003 represents the present value of the future payments to be made to Millennium. Interest has been imputed on this note payable at the rate of 6.2%.

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ILEX ONCOLOGY, INC.
2003 ANNUAL REPORT ON FORM 10-K/A

18. QUARTERLY FINANCIAL DATA (UNAUDITED)

The tables below show our results of operations by quarter for the years ended December 31, 2003 and 2002. Included in these results are certain prior year reclassifications to conform to the current year presentation (see Note 2). Amounts are in thousands, except per share amounts.


	2003 Quarter Ended
	March 31			June 30			September 30			December 31			Year
Revenue	$	8,684		$	10,127		$	8,726		$	7,252		$	34,789
Operating loss		(24,962	)		(8,748	)		(10,761	)		(17,804	)		(62,275	)
Net loss		(24,921	)		(8,792	)		(10,624	)		(17,777	)		(62,114	)

Net loss per share:
Basic and diluted	$	(.76	)	$	(.27	)	$	(.29	)	$	(.46	)	$	(1.76	)


	2002 Quarter Ended
	March 31			June 30			September 30			December 31			Year
Revenue	$	8,271		$	7,428		$	7,919		$	7,283		$	30,901
Operating loss		(9,860	)		(15,829	)		(10,038	)		(10,570	)		(46,297	)
Net loss		(9,122	)		(15,486	)		(10,405	)		(11,143	)		(46,156	)

Net loss per share:
Basic and diluted	$	(.28	)	$	(.48	)	$	(.32	)	$	(.34	)	$	(1.42	)

19. SUBSEQUENT EVENT

On February 26, 2004, we entered into a definitive merger agreement with Genzyme. Under the terms of the Merger Agreement, each outstanding share of ILEX common stock, $0.01 par value per share, will be converted into the right to receive a fraction of a share (the “Exchange Ratio”) of Genzyme common stock. The Exchange Ratio will be calculated by dividing $26.00 by the average per share closing price of Genzyme common stock (the “Genzyme Share Price”) as reported by the NASDAQ National Market over the twenty trading days ending on the fifth trading day prior to the closing date of the Mergers, except that if the Genzyme Share Price is greater than $59.88, the Exchange Ratio will be 0.4342, and if the Genzyme Share Price is less than $46.58, the Exchange Ratio will be 0.5582. In addition, each outstanding option to purchase ILEX common stock will be immediately vested and will be converted into an option to purchase the number of shares of Genzyme common stock equal to the number of shares of ILEX common stock subject to such option multiplied by the Exchange Ratio, and the associated exercise price will be adjusted accordingly. Until the closing date, which is anticipated to occur in mid-2004, we will continue to operate independently of Genzyme. The closing of the transaction is contingent upon approval by certain regulatory authorities including the U.S. Federal Trade Commission and our shareholders. If the merger is not completed, we maybe subject to payment of a $32.5 million termination fee under certain circumstances and payment of a maximum of $2.5 million in costs related to the merger, such as financial, advisory, legal and accounting fees. Additionally, the Rights Agreement discussed in Note 8 was amended on February 26, 2004 to, among other things, exclude Genzyme Corporation from the definition of an Acquiring Person.

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